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The role of idiosyncratic jumps in stock markets

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  • Lee, Suzanne S.

Abstract

I study how realized idiosyncratic jumps play a role in pricing individual stocks. I find that stocks with high variances associated with positive idiosyncratic jumps tend to have low subsequent returns. To explain the negative premium, I show that positive idiosyncratic jump variances are important predictors for future skewness. Thus, my finding is consistent with investors’ preference for unusually large gains over short horizons. I demonstrate the economic significance of my results by highlighting the superior performance of a strategy based on variances associated with positive idiosyncratic jumps compared to strategies based on other variance measures.

Suggested Citation

  • Lee, Suzanne S., 2023. "The role of idiosyncratic jumps in stock markets," Journal of Financial Markets, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:finmar:v:64:y:2023:i:c:s1386418123000186
    DOI: 10.1016/j.finmar.2023.100820
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    More about this item

    Keywords

    Idiosyncratic jump risk; Idiosyncratic risk decomposition; Cross-section of stock returns; Preference for large gains;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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