The role of idiosyncratic jumps in stock markets

Suzanne S. Lee

Journal of Financial Markets, 2023, vol. 64, issue C

Abstract: I study how realized idiosyncratic jumps play a role in pricing individual stocks. I find that stocks with high variances associated with positive idiosyncratic jumps tend to have low subsequent returns. To explain the negative premium, I show that positive idiosyncratic jump variances are important predictors for future skewness. Thus, my finding is consistent with investors’ preference for unusually large gains over short horizons. I demonstrate the economic significance of my results by highlighting the superior performance of a strategy based on variances associated with positive idiosyncratic jumps compared to strategies based on other variance measures.

Keywords: Idiosyncratic jump risk; Idiosyncratic risk decomposition; Cross-section of stock returns; Preference for large gains (search for similar items in EconPapers)
JEL-codes: G00 G10 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:64:y:2023:i:c:s1386418123000186

DOI: 10.1016/j.finmar.2023.100820

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