Investor sentiment and skewness risk premium

Soumaya Yaakoubi

Applied Economics, 2024, vol. 56, issue 35, 4194-4208

Abstract: This paper provides new evidence on the pricing of market skewness risk by incorporating investor sentiment in the relation between sensitivity to innovations in implied market skewness and expected stock returns. Using both univariate and multivariate specifications, we conduct an extensive series of asset pricing tests on the cross-section of stocks during high and low sentiment periods separately. We find that market skewness risk carries a negative premium that cannot be explained away by known risk factors when sentiment is low. In contrast, the results are not conducive to a risk explanation when sentiment is high.

Date: 2024
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DOI: 10.1080/00036846.2023.2210822

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