Pricing of Firm Specific Jump Risk

This paper studies the relationship between the cross section of stock returns and firm specific jump risk. Using option data, we estimate various option-based time-series. Sorting firms according to their firm specific jump risk, we find that this risk is priced for small stocks. Furthermore, we show that it is genuinely idiosyncratic, and not related to systematic volatility or systematic jump risk. We also find that firms have similar exposures to upward and downward jumps and both jumps are negatively priced, but the effect is more pronounce for downward jumps. Besides, it is documented that our results are closely linked to the idiosyncratic volatility (ivol) anomaly by Ang et al. (2006). Therefore, if ivol proxies for an omitted factor, our results suggest that the exposure to idiosyncratic jump risk is related to this factor.