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The Factor Structure of Jump Risk

Author

Listed:
  • Torben G. Andersen

    (Department of Finance, Northwestern University)

  • Yi Ding

    (Faculty of Business Administration, University of Macau)

  • Viktor Todorov

    (Department of Finance, Northwestern University)

  • Seunghyeon Yu

    (Department of Finance, Northwestern University)

Abstract

This paper develops a test for deciding whether latent systematic jumps in a large cross-section of asset prices obey a linear factor structure of low dimension. The test relies on a panel of high-frequency return observations for a large cross-section of assets over a fixed time interval. The latent systematic jumps are identified nonparametrically. The test is based on evaluating the statistical significance of the smallest eigenvalues of the outer product of the matrix of high-frequency increments that are identified to contain systematic jumps. The limit behavior of the test statistic, under the null hypothesis, is highly nonstandard, with systematic di!usive risks as well as idiosyncratic di!usive and jump risks in the asset prices all contributing to the limit in a distinct manner. An easy-to-implement bootstrap method is developed that allows for feasible implementation of the test. Empirical application to stocks in the S&P 500 index illustrates the usefulness of the proposed test.

Suggested Citation

  • Torben G. Andersen & Yi Ding & Viktor Todorov & Seunghyeon Yu, 2025. "The Factor Structure of Jump Risk," Working Papers 202531, University of Macau, Faculty of Business Administration, revised Mar 2026.
    • Handle: RePEc:boa:wpaper:202531
    as

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    File URL: https://fba.um.edu.mo/wp-content/uploads/RePEc/doc/202531.pdf
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    References listed on IDEAS

    as
    1. Qihui Chen & Zheng Fang, 2018. "Improved Inference on the Rank of a Matrix," Papers 1812.02337, arXiv.org, revised Mar 2019.
    2. Jia Li & Viktor Todorov & George Tauchen, 2019. "Jump factor models in large cross‐sections," Quantitative Economics, Econometric Society, vol. 10(2), pages 419-456, May.
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    4. Bollerslev, Tim & Li, Sophia Zhengzi & Todorov, Viktor, 2016. "Roughing up beta: Continuous versus discontinuous betas and the cross section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 120(3), pages 464-490.
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    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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