Realized Volatility, Jump and Beta: evidence from Canadian Stock Market

Dinesh Gajurel and Biplob Chowdhury

Applied Economics, 2021, vol. 53, issue 55, 6376-6397

Abstract: Inclusion of jump component in the price process has been a long debate in finance literature. In this paper, we identify and characterize jump risks in the Canadian stock market using high-frequency data from the Toronto Stock Exchange. Our results provide a strong evidence of jump clustering – about 30% of jumps occur within first 30 minutes of trading hours, and about 25% of jumps are due to the overnight returns. While average intraday jump is negative, jumps induced by overnight returns bring a cancellation effect yielding average size of the jumps to zero. We show that the economic significance of jump component in volatility forecasting is significant but nominal. Our results further demonstrate that market jumps and overnight returns bring significant changes in systematic risk of stocks. From a cross-sectional perspective, while the average effect of market jumps on the beta is not significantly different from zero, the average effect of overnight returns is statistically significant. Overall, our results suggest that systematic risk induced by the market jumps could be hedged by combining value stocks and growth stocks in a portfolio whereas the systematic risk induced by overnight returns can not be hedged even with a well diversified portfolio.

Date: 2021
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DOI: 10.1080/00036846.2021.1940082

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