Following Elton (1999), we argue that realized returns are often a poor proxy for expected returns. Rational expectations of infrequently occurring jumps in returns will cause expected and realized returns to differ systematically over long periods. We show both theoretically and, using a sample...

The apparent bias in implied volatility as a forecast of the subsequently realized volatility is a well-documented empirical puzzle. As suggested by e.g. Feinstein (1989), Jackwerth and Rubinstein (1996), and Bates (1997), we test whether unrealized expectations of jumps in volatility could...

In the empirical testing of many asset pricing models it is assumed that realised returns are an unbiased estimate of expected returns over the period of study. In this paper it is argued that the occurrence of negative jumps in a firm's future earnings and, consequently, in its stock price, is...