Reference : Skewness Risk Premium: Theory and Empirical Evidence
Scientific journals : Article
Business & economic sciences : Finance
Finance
http://hdl.handle.net/10993/39362
Skewness Risk Premium: Theory and Empirical Evidence
English
Lin, Yuehao []
Lehnert, Thorsten mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
Wolff, Christian mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
May-2019
International Review of Financial Analysis
Elsevier
63
174-185
Yes
International
1057-5219
1873-8079
Netherlands
[en] Using an equilibrium asset and option pricing model in a simple economy under jump diffusion, we show theoretically that the aggregated excess market returns can be predicted by the skewness risk premium, which is constructed to be the difference between the physical and the risk-neutral skewness. In an empirical application of the model using more than 20 years of data on S&P500 index options, we find that, in line with theory, risk-averse investors demand risk-compensation for holding stocks when the market skewness risk premium is high. However, when we characterize periods of high and low risk aversion, we show that in line with theory, the relationship only holds when risk aversion is high. In periods of low risk aversion, investors demand lower risk compensation, thus substantially weakening the skewness-risk-premium-return trade off.
http://hdl.handle.net/10993/39362

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