Jump Diffusion Phenomenon, Realized Jumps, and Stock Returns

Panel Quantile Regression Analysis of Aggregate Market and Sectors

Abstract

Past financial crisis and uncertain dynamics of stock market direct the highly volatile trend of stock prices and returns. These volatility conditions may affect investors and financial managers severely. Therefore, it is necessary to find comprehensive framework to understand the dynamics of stock return volatility. This study is aimed at examination of dynamics of jump diffusion phenomenon of stock return volatility. Comparative insight of aggregate stock market and sectoral stock returns in response with diffusive risk, jump risk, return asymmetry and total volatility measures of jump diffusion are provided in this research. This study is based on the sample of 251 non-financial firms with 8 sectors listed in PSX formerly in KSE during the period of 2006 to 2018. This research uses panel data quantile regression model with fixed effect estimates for statistical results. The results indicate that non-linear events with proxy results of realized jumps have significant negative impact on aggregate stock market return. But sectoral stock returns show mixed of positive and negative linkages with realized jumps. Jump diffusion components of volatility results confirmed non-linear positive and negative impact on sectoral stock returns. This research will provide diversified perspectives of managing investment decisions.

Key Words: Jump Diffusion Processes, Realized Jumps, Volatility, Non-Linear Events, Financial risk

JEL Codes: C32, G12, G14, G32