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Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk

Peter Christoffersen, Mathieu Fournier (), Kris Jacobs () and Mehdi Karoui ()
Additional contact information
Mathieu Fournier: HEC Montreal, Postal: HEC Montreal, 3000, Chemin de la Côte-Sainte-Catherine Montreal, Quebec H2X 2L3 H3T 2A7 Canada
Kris Jacobs: University of Houston - C.T. Bauer College of Business, Postal: University of Houston - C.T. Bauer College of Business, Houston, TX 77204-6021 United States
Mehdi Karoui: McGill University, Postal: McGill University, 1001 Sherbrooke St. W Montreal, Quebec H3A 1G5 Canada

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We show that the prices of risk for factors that are nonlinear in the market return are readily obtained using index option prices. We apply this insight to the price of co-skewness and co-kurtosis risk. The price of co-skewness risk corresponds to the spread between the physical and the risk-neutral second moments, and the price of co-kurtosis risk corresponds to the spread between the physical and the risk-neutral third moments. The option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An out-of-sample analysis of factor models with co-skewness and co-kurtosis risk indicates that the new estimates of the price of risk improve the models performance. Models with higher-order market moments also robustly outperform standard competitors such as the CAPM and the Fama-French model.

Keywords: Co-skewness; co-kurtosis; risk premia; options; cross-section; out-of-sample (search for similar items in EconPapers)
JEL-codes: G12 G13 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-rmg
Date: 2015-11-09
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