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Analyzing the Effect of a Market Jump on an Equity’s Returns

Analyzing the Effect of a Market Jump on an Equity’s Returns. Junior Research Seminar Economics 201FS. Outline. Objective Procedure Summation of Results Timeline. Capital Asset Pricing Model. Return of Equity = Risk-free rate + (Beta * Market Premium)

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Analyzing the Effect of a Market Jump on an Equity’s Returns

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  1. Analyzing the Effect of a Market Jump on an Equity’s Returns Junior Research Seminar Economics 201FS

  2. Outline • Objective • Procedure • Summation of Results • Timeline

  3. Capital Asset Pricing Model Return of Equity = Risk-free rate + (Beta * Market Premium) Beta = Cov(Market Return, Equity Return) / Var(Market Return) Assumptions: • Market return and residual are uncorrelated • Residuals are mutually uncorrelated • Residuals are difference between actual return and predicted return

  4. Objective • Introduce a dummy variable (Jmt), that depends on if the market (SPY) jumped • Lee/Mykland • rcmt = (1-Jmt)(rmt) • rjmt = (Jmt)(rmt) rit = αi + βic (1-Jmt)(rmt) + βij (Jmt)(rmt) + εit

  5. Procedure • Lags/Leads for Beta Calculation • Lee/Mykland test • Flagged 1318 jumps in SPY • Separated “flagged jump returns” and “continuous returns” ritc = αi + βic(rmtc) + εit ritj = αi + βij(rmtj) + εit

  6. Summation of Results

  7. Results

  8. Timeline • April 25th • Model: • Formalize statistical analysis • One-equation model • Extend to other 40 stocks • Other Areas: • Lag/Leads for Beta Calculation • Shifting Beta

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