Analyzing the Effect of a Market Jump on an Equity

1
Analyzing the Effect of a Market Jump on an
Equitys Returns

• Junior Research Seminar
• Economics 201FS

2
Outline

• Objective
• Procedure
• Summation of Results
• Timeline

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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

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Objective

• Introduce a dummy variable (Jmt), that depends on
  if the market (SPY) jumped
• Lee/Mykland
• rcmt (1-Jmt)(rmt)
• rjmt (Jmt)(rmt)
• rit ai ßic (1-Jmt)(rmt) ßij (Jmt)(rmt)
  eit

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Procedure

• Lags/Leads for Beta Calculation
• Lee/Mykland test
• Flagged 1318 jumps in SPY
• Separated flagged jump returns and continuous
  returns
• ritc ai ßic(rmtc) eit
• ritj ai ßij(rmtj) eit

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Summation of Results
Standard CAP-M Beta
1 Lag/Lead 1.0592
2 Lags/Leads 0.6932
3 Lags/Leads 0.2169
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Results
Dep. Variable Indep. Variable Coeff. SE t Pgtt 95 CI
Corres. Equity Returns Flagged Jump Returns (Mkt) 0.12006 0.00182 65.917 0 0.1144-0.1257
Dep. Variable Indep. Variable Coeff. SE t Pgtt 95 CI
Corres. Equity Returns Cont. Returns (Mkt) 0.3671 0.00106 346.51 0 0-0.7344
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Timeline

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