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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

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

Junior Research Seminar

Economics 201FS

outline
Outline
  • Objective
  • Procedure
  • Summation of Results
  • Timeline
capital asset pricing model
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
objective
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

procedure
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

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