Article (Scientific journals)
Skewness Risk Premium: Theory and Empirical Evidence
Lin, Yuehao; Lehnert, Thorsten; Wolff, Christian
2019In International Review of Financial Analysis, 63, p. 174-185
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Abstract :
[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.
Disciplines :
Finance
Author, co-author :
Lin, Yuehao
Lehnert, Thorsten  ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF)
Wolff, Christian ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF)
External co-authors :
yes
Language :
English
Title :
Skewness Risk Premium: Theory and Empirical Evidence
Publication date :
May 2019
Journal title :
International Review of Financial Analysis
ISSN :
1873-8079
Publisher :
Elsevier, Netherlands
Volume :
63
Pages :
174-185
Peer reviewed :
Peer Reviewed verified by ORBi
Focus Area :
Finance
Available on ORBilu :
since 18 April 2019

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