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Aggregate Jump and Volatility Risk in the Cross-Section of Stock Returns

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  • MARTIJN CREMERS
  • MICHAEL HALLING
  • DAVID WEINBAUM

Abstract

type="main"> We examine the pricing of both aggregate jump and volatility risk in the cross-section of stock returns by constructing investable option trading strategies that load on one factor but are orthogonal to the other. Both aggregate jump and volatility risk help explain variation in expected returns. Consistent with theory, stocks with high sensitivities to jump and volatility risk have low expected returns. Both can be measured separately and are important economically, with a two-standard-deviation increase in jump (volatility) factor loadings associated with a 3.5% to 5.1% (2.7% to 2.9%) drop in expected annual stock returns.

Suggested Citation

  • Martijn Cremers & Michael Halling & David Weinbaum, 2015. "Aggregate Jump and Volatility Risk in the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 70(2), pages 577-614, April.
    • Handle: RePEc:bla:jfinan:v:70:y:2015:i:2:p:577-614
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    File URL: http://hdl.handle.net/10.1111/jofi.12220
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