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Do Jumps Contribute to the Dynamics of the Equity Premium?

  • John M. Maheu

    ()

    (Department of Economics, University of Toronto, Canada; RCEA, Italy)

  • Thomas H. McCurdy

    ()

    (Rotman School of Managment, University of Toronto, Canada; CIRANO, Canada)

  • Xiaofei Zhao

    ()

    (Rotman School of Management, University of Toronto, Canada)

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.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 47_12.

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Date of creation: Jun 2012
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Handle: RePEc:rim:rimwps:47_12
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