Analyzing the Effect of a Market Jump on an Equity’s Returns
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Transcript of 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
Junior Research Seminar
Economics 201FS
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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:
(i) Market return and residual are uncorrelated
(ii) Residuals are mutually uncorrelated
(iii) 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 = αi + βic (1-Jmt)(rmt) + βij (Jmt)(rmt) + εit
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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 = αi + βic(rmtc) + εit
ritj = αi + βij(rmtj) + εit
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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 P>t 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 P>t 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