Market Skewness Risk and the Cross-Section of Stock Returns

Bo Young Chang, Peter Christoffersen and Kris Jacobs
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Bo Young Chang: McGill University
Kris Jacobs: University of Houston and University of McGill

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: The cross-section of stock returns has substantial exposure to risk captured by higher moments in market returns. We estimate these moments from daily S&P 500 index option data. The resulting time series of factors are thus genuinely conditional and forward-looking. Stocks with high sensitivities to innovations in implied market volatility and skewness exhibit low returns on average, whereas those with high sensitivities to innovations in implied market kurtosis exhibit somewhat higher returns on average. The results on market skewness risk are robust to various permutations of the empirical setup. The estimated premium for bearing market skewness risk is between -3.72% and -5.76% annually. This market skewness risk premium is economically significant and cannot be explained by other common risk factors such as the market excess return or the size, book-to-market, momentum, and market volatility factors, or by firm characteristics. Using ICAPM intuition, the negative price of market skewness risk indicates that it is a state variable that negatively affects the future investment opportunity set.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2010-07
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Market skewness risk and the cross section of stock returns (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:11-18

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