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

Martijn Cremers, Michael Halling, David Weinbaum

Research output: Contribution to journalArticlepeer-review

75 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)577-614
Number of pages38
JournalJournal of Finance
Volume70
Issue number2
DOIs
StatePublished - Apr 1 2015

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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