Explaining Stock Returns with Intraday Jumps

Diego Amaya, Aurelio Vasquez
2011 Social Science Research Network  
The presence of jumps in stock prices is widely accepted. In this paper, we explore the impact of jumps on the pricing of stocks by extracting the average jump size of individual stock returns from high-frequency data and examining the empirical relation with subsequent stock returns. Given that jump di¤usion models predict a negative relation between expected stock returns and the average jump size, our goal is to empirically con...rm that negative relation. We form ten portfolios based of the
more » ... folios based of the average jump size and compute subsequent weekly stock returns. The raw returns of the decile of stocks with low jump size exceed those of the decile of stocks with high jump size by 74 basis points with a t-statistic of 10.89. To rule out that average jump size is not a proxy of ...rm characteristics, we perform additional double-sortings and regressions with proxy variables such as size, book-to-market, previous week return, volatility, skewness, kurtosis and illiquidity. The results are con...rmed. Comments are welcome. We both want to thank IFM 2 for ...nancial support. Any remaining inadequacies are ours alone. Correspondence to:
doi:10.2139/ssrn.1929359 fatcat:pv7hytamszfj5idn65ms45lug4