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Market skewness risk and the cross section of stock returns

Bo Young Chang, Peter Christoffersen and Kris Jacobs

Journal of Financial Economics, 2013, vol. 107, issue 1, 46-68

Abstract: The cross section of stock returns has substantial exposure to risk captured by higher moments of market returns. We estimate these moments from daily Standard & Poor's 500 index option data. The resulting time series of factors are genuinely conditional and forward-looking. Stocks with high exposure to innovations in implied market skewness exhibit low returns on average. The results are robust to various permutations of the empirical setup. The market skewness risk premium is statistically and economically significant and cannot be explained by other common risk factors such as the market excess return or the size, book-to-market, momentum, and market volatility factors, or by firm characteristics.

Keywords: Skewness risk; Cross section; Volatility risk; Option-implied moments; Factor-mimicking portfolios (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2013
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