Risk Prudence Premia

Fabio Girardi and Paul Schneider
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Fabio Girardi: Vienna University of Economics and Business - Department of Finance, Accounting & Statistics; Vienna Graduate School of Finance (VGSF)
Paul Schneider: University of Lugano - Institute of Finance; Swiss Finance Institute

No 26-68, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We attribute the coskewness premium in the cross-section of equity portfolios, the negative variance risk premium, and the downward-sloping implied volatility skew to one common source, risk prudence, the aversion to downside risk. The discount factor in a minimum-divergence economy with skew-normal factor payoffs delivers this dependence through a single parameter. A decomposition into a symmetric and a downside-risk channel yields their prices of risk, estimated on U.S. characteristic-managed portfolios. The estimates have the signs the model predicts in the cross-section and in index and sector-fund options.

Pages: 68 pages
Date: 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2668

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