Market skewness risk and the cross section of stock returns |
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| Authors: | Bo Young Chang Peter Christoffersen Kris Jacobs |
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| Affiliation: | 1. Bank of Canada, Canada;2. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario, Canada M5P 3E6;3. Copenhagen Business School and CREATES, Denmark;4. C.T. Bauer College of Business, University of Houston, United States;5. Tilburg University, The Netherlands |
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| Abstract: | The cross section of stock returns has substantial exposure to risk captured by higher moments of market returns. We estimate these moments from daily Standard & Poor's 500 index option data. The resulting time series of factors are genuinely conditional and forward-looking. Stocks with high exposure to innovations in implied market skewness exhibit low returns on average. The results are robust to various permutations of the empirical setup. The market skewness risk premium is statistically and 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. |
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| Keywords: | Skewness risk Cross section Volatility risk Option-implied moments Factor-mimicking portfolios |
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