Moment risk premia and the cross-section of stock returns in the European stock market

Elyas Elyasiani, Luca Gambarelli and Silvia Muzzioli

Journal of Banking & Finance, 2020, vol. 111, issue C

Abstract: This article investigates whether volatility, skewness, and kurtosis risks are priced in the European stock market and assess the signs and the magnitudes of the corresponding risk premia. To this end, we adopt two approaches: a model-free approach based on swap contracts, and a model-based approach built on portfolio-sorting techniques. A number of results are obtained. First, stocks with high exposure to innovations in implied market volatility (skewness) exhibit low (high) returns on average. Second, the estimated premium for bearing market volatility (skewness) risk is negative (positive), robust to the two approaches employed, and statistically and economically significant. Third, in contrast with studies on the US stock market, we identify the existence of a size premium in the European stock market: small capitalization stocks earn higher returns than high capitalization stocks.

Keywords: Volatility risk; Skewness risk; Kurtosis risk; Cross-section; Risk-neutral moments; Risk premia (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:111:y:2020:i:c:s037842661930305x

DOI: 10.1016/j.jbankfin.2019.105732

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