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

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# Analyzing the Effect of a Market Jump on an Equity’s Returns - PowerPoint PPT Presentation

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

Junior Research Seminar

Economics 201FS

Outline
• Objective
• Procedure
• Summation of Results
• Timeline
Capital Asset Pricing Model

Return of Equity = Risk-free rate

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
• 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
• 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
• April 25th
• Model:
• Formalize statistical analysis
• One-equation model
• Extend to other 40 stocks
• Other Areas: