On the Nature of (Jump) Skewness Risk Premia

Piotr Orłowski (), Paul Schneider () and Fabio Trojani ()
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Piotr Orłowski: Department of Finance, HEC Montréal, Montréal, Québec H3T 2A7, Canada; Canadian Derivatives Institute, Montréal, Québec H3T 2A7, Canada
Paul Schneider: Department of Finance, Università della Svizzera Italiana, 6900 Lugano, Switzerland
Fabio Trojani: Department of Economics, Social Studies, Applied Mathematics, and Statistics, University of Turin, 10124 Turin, Italy; Geneva Finance Research Institute, University of Geneva, 1211 Geneva, Switzerland

Management Science, 2024, vol. 70, issue 2, 1154-1174

Abstract: Market skewness risk is priced, but the components of its premium are not fully understood. We propose new trading strategies decomposing the skewness risk premium into jump and leverage effect components, and we analyze the skewness risk premia in the market for S&P 500 index options. We find that the skewness premium is higher when markets are closed than during trading hours, consistently with uncertainty resolution patterns by non-U.S investors; that it increases after left-tail market events; and that it is distinct from the variance premium. Moreover, during trading hours, the skewness premium is dominated by priced jump risk.

Keywords: skewness premium; jump risk; index options; high-frequency data; VIX (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:2:p:1154-1174

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