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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ERIM Top-Core Articles
Journal of Empirical Finance
Erasmus School of Economics

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