Do idiosyncratic jumps matter?

Nishad Kapadia and Morad Zekhnini

Journal of Financial Economics, 2019, vol. 131, issue 3, 666-692

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.

Keywords: Idiosyncratic jumps; Idiosyncratic risk; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:666-692

DOI: 10.1016/j.jfineco.2018.08.014

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