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Jointly estimating jump betas

Vassilis Polimenis (Division of Business Administration, School of Law and Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece)
Ioannis Papantonis (Division of Business Administration, School of Law and Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece)

Journal of Risk Finance

ISSN: 1526-5943

Article publication date: 17 March 2014




This paper aims to enhance a co-skew-based risk measurement methodology initially introduced in Polimenis, by extending it for the joint estimation of the jump betas for two stocks.


The authors introduce the possibility of idiosyncratic jumps and analyze the robustness of the estimated sensitivities when two stocks are jointly fit to the same set of latent jump factors. When individual stock skews substantially differ from those of the market, the requirement that the individual skew is exactly matched is placing a strain on the single stock estimation system.


The authors argue that, once the authors relax this restrictive requirement in an enhanced joint framework, the system calibrates to a more robust solution in terms of uncovering the true magnitude of the latent parameters of the model, at the same time revealing information about the level of idiosyncratic skews in individual stock return distributions.

Research limitations/implications

Allowing for idiosyncratic skews relaxes the demands placed on the estimation system and hence improves its explanatory power by focusing on matching systematic skew that is more informational. Furthermore, allowing for stock-specific jumps that are not related to the market is a realistic assumption. There is now evidence that idiosyncratic risks are priced as well, and this has been a major drawback and criticism in using CAPM to assess risk premia.

Practical implications

Since jumps in stock prices incorporate the most valuable information, then quantifying a stock's exposure to jump events can have important practical implications for financial risk management, portfolio construction and option pricing.


This approach boosts the “signal-to-noise” ratio by utilizing co-skew moments, so that the diffusive component is filtered out through higher-order cumulants. Without making any distributional assumptions, the authors are able not only to capture the asymmetric sensitivity of a stock to latent upward and downward systematic jump risks, but also to uncover the magnitude of idiosyncratic stock skewness. Since cumulants in a Levy process evolve linearly in time, this approach is horizon independent and hence can be deployed at all frequencies.



Polimenis, V. and Papantonis, I. (2014), "Jointly estimating jump betas", Journal of Risk Finance, Vol. 15 No. 2, pp. 131-148.



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