Good Jumps, Bad Jumps, and Conditional Equity Premium∗

We uncover significant effects of jump risk on conditional equity premium. Realized volatility due to negative or “bad” (positive or “good”) jumps in stock market prices predicts a rising (falling) near-term equity premium. The forecasting power of signed jump risk measures remains statistically significant even when we control for variance risk premium that Drechsler and Yaron (2011) attribute to jump risk. Our novel empirical findings are broadly consistent with an extended Drechsler and Yaron model that also allows stochastic volatility of volatility to affect variance risk premium and conditional equity premium as in Bollerslev, Tauchen, and Zhou (2009). JEL classification: G10, G12, G17.