Journal of Financial Economics Vol. 131 No. 3 2019
Do idiosyncratic jumps matter?
Abstract
We show that idiosyncratic jumps are a key determinant of mean stock returns from both an ex post and ex ante perspective. Ex post, the entire annual average return of a typical stock accrues on the four days on which its price jumps. Ex ante, idiosyncratic jump risk earns a premium: a value-weighted weekly long-short portfolio that buys (sells) stocks with high (low) predicted jump probabilities earns annualized mean returns of 9.4% and four-factor alphas of 8.1%. This strategy’s returns are larger when there are greater limits to arbitrage. These results are consistent with investor aversion to idiosyncratic jump risk.
- DOI
- 10.1016/j.jfineco.2018.08.014
- Volume
- 131
- Issue
- 3
- Pages
- 666-692
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib