Do jumps contribute to the dynamics of the equity premium?

This paper investigates whether risks associated with time-varying arrival of jumps and their effect on the dynamics of higher moments of returns are priced in the conditional mean of daily market excess returns. We find that jumps and jump dynamics are significantly related to the market equity pre...

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Bibliographic Details
Published in:Journal of financial economics 2013-11, Vol.110 (2), p.457-477
Main Authors: Maheu, John M., McCurdy, Thomas H., Zhao, Xiaofei
Format: Article
Language:English
Subjects:
Equity
Equity premium
Financial economics
Higher-order moments
Investment analysis
Jumps
Kurtosis
Personal finance
Portfolio analysis
Portfolio performance
Pricing
Rates of return
Risk premiums
Securities markets
Securities prices
Skewness
Studies
Time series
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Summary:This paper investigates whether risks associated with time-varying arrival of jumps and their effect on the dynamics of higher moments of returns are priced in the conditional mean of daily market excess returns. We find that jumps and jump dynamics are significantly related to the market equity premium. The results from our time-series approach reinforce the importance of the skewness premium found in cross-sectional studies using lower-frequency data; and offer a potential resolution to sometimes conflicting results on the intertemporal risk-return relationship. We use a general utility specification, consistent with our pricing kernel, to evaluate the relative value of alternative risk premium models in an out-of-sample portfolio performance application.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2013.07.006