The cumulant risk premium

Albert S. (Pete) and Karamfil Todorov

No 1128, BIS Working Papers from Bank for International Settlements

Abstract: We develop a novel methodology to measure the risk premium of higher-order cumulants (closely related to the moments of a distribution) based on leveraged ETFs. We show that the risk premium on these ETFs reflects the difference between physical and risk-neutral cumulants, which we call the cumulant risk premium (CRP). We show that the CRP is different from zero across asset classes (equities, bonds, commodities, currencies, and volatility) and is large in times of stress. We illustrate that highly leveraged strategies are extremely exposed to higher-order cumulants. Our results have implications for hedge funds, factor models, momentum strategies, and options.

Keywords: cumulants; leverage; ETF; factor models; VIX; momentum; options (search for similar items in EconPapers)
JEL-codes: G1 G12 G13 G23 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-fmk and nep-rmg
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