The Factor Structure of Jump Risk

Torben Andersen, Yi Ding (), Viktor Todorov () and Seunghyeon Yu ()
Additional contact information
Yi Ding: Faculty of Business Administration, University of Macau
Viktor Todorov: Department of Finance, Northwestern University
Seunghyeon Yu: Department of Finance, Northwestern University

No 202531, Working Papers from University of Macau, Faculty of Business Administration

Abstract: This paper develops a test for deciding whether latent systematic jumps in a large cross-section of asset prices obey a linear factor structure of low dimension. The test relies on a panel of high-frequency return observations for a large cross-section of assets over a fixed time interval. The latent systematic jumps are identified nonparametrically. The test is based on evaluating the statistical significance of the smallest eigenvalues of the outer product of the matrix of high-frequency increments that are identified to contain systematic jumps. The limit behavior of the test statistic, under the null hypothesis, is highly nonstandard, with systematic di!usive risks as well as idiosyncratic di!usive and jump risks in the asset prices all contributing to the limit in a distinct manner. An easy-to-implement bootstrap method is developed that allows for feasible implementation of the test. Empirical application to stocks in the S&P 500 index illustrates the usefulness of the proposed test.

Keywords: Jumps; high-dimensional analysis; high-frequency data; infinitely divisible distribution; linear factor model (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C58 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2025-06, Revised 2026-03
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
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Published in UM-FBA Working Paper Series

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