Relative Signed Jump and Future Stock Returns

Seema Rehman (), Saqib Sharif () and Wali Ullah ()
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Seema Rehman: Department of Management Sciences, Shaheed Zulfiqar Ali Bhutto Institute of Science and Technology (SZABIST), 90 and 100 Clifton, Karachi-75600, Pakistan.
Saqib Sharif: Department of Finance, Institute of Business Administration (IBA), University Road, Karachi-75270, Pakistan.
Wali Ullah: Department of Economics, Institute of Business Administration (IBA), University Road, Karachi-75270, Pakistan.

Journal for Economic Forecasting, 2023, issue 1, 25-45

Abstract: Due to the importance of expected return on investment documented in financial literature, studies have developed and examined numerous methods and techniques and assessed their predictability power. This research examines if realized variation measures of individual firms contain information for future stock returns using trading strategy that takes long position for portfolio of stocks having high realized variation measures and takes short position for portfolio of stocks having low realized variation measures. Relying on recent advancements in asset pricing, intraday stock price increments are decomposed into their positive and negative constituents and their summed squares are categorized as good and bad volatilities, respectively. On the basis of the findings, it is evidenced that relative signed jump measure (RSJ) acquired by taking the difference of good and bad volatilities, scaled by total daily volatility, has positive risk premium in the cross section of stock returns in the emerging stock market of Pakistan. Results for realized kurtosis (RKT) are also positive and significant for predicting next week’s cross sectional stock return. Furthermore, the predictive power of realized volatility (RVOL) and realized skewness (RSK) are analyzed, but no robust evidence is traced for these realized measures.

Keywords: cross-section of equity returns; emerging market; intraday data; realized skewness; relative signed jump (search for similar items in EconPapers)
JEL-codes: G10 G12 G17 O16 (search for similar items in EconPapers)
Date: 2023
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