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Stock Price Jumps and Cross-Sectional Return Predictability

Published online by Cambridge University Press:  16 October 2013

George J. Jiang and
Tong Yao
George J. Jiang
Affiliation:
george.jiang@wsu.edu, College of Business, Washington State University, PO Box 644746, Pullman, WA 99164
Tong Yao
Affiliation:
tong-yao@uiowa.edu, Tippie College of Business, University of Iowa, 21 E Market St, Iowa City, IA 52242.
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Abstract

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We identify large discontinuous changes, known as jumps, in daily stock prices and explore the role of jumps in cross-sectional stock return predictability. Our results show that small and illiquid stocks have higher jump returns to the extent that cross-sectional differences in jumps fully account for the size and illiquidity effects. Based on value-weighted portfolios, jumps also account for the value premium. On the other hand, jumps are not the cause of momentum or net share issue effects. The findings of our study shed new light on stock return dynamics and present challenges to conventional explanations of stock return predictability.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 5 , October 2013, pp. 1519 - 1544
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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