This paper proposes a GARCH-jump mixed model for individual stock returns that takes into account four types of risks: the systematic and idiosyncratic jumps and the systematic and idiosyncratic diffusive volatility. By considering a general pricing kernel with all underlying risk factors, we decompose the expected stock return into four risk premiums related to the four types of risks. Empirically, we estimate the model jointly for daily stock returns and market returns and investigate the asset pricing consequences. We find that idiosyncratic jump intensity contributes a major part of the total jump intensity and idiosyncratic jumps are key determinants of expected stock return.

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Keywords Asset pricing, GARCH filtering, Jump–diffusion model
JEL Estimation (jel C13), Optimization Techniques; Programming Models; Dynamic Analysis (jel C61), Portfolio Choice; Investment Decisions (jel G11), Asset Pricing (jel G12)
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Series ERIM Top-Core Articles
Journal Journal of Empirical Finance
Xiao, X, & Zhou, C. (2018). The decomposition of jump risks in individual stock returns. Journal of Empirical Finance, 47, 207–228. doi:10.1016/j.jempfin.2018.04.002