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Market skewness risk and the cross section of stock returns

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  • Chang, Bo Young
  • Christoffersen, Peter
  • Jacobs, Kris

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 107 (2013)
Issue (Month): 1 ()
Pages: 46-68

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Handle: RePEc:eee:jfinec:v:107:y:2013:i:1:p:46-68

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Skewness risk; Cross section; Volatility risk; Option-implied moments; Factor-mimicking portfolios;

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References

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Cited by:
  1. Sévi, Benoît, 2013. "An empirical analysis of the downside risk-return trade-off at daily frequency," Economic Modelling, Elsevier, vol. 31(C), pages 189-197.
  2. Schwarz, Claudia, 2014. "Investor fears and risk premia for rare events," Discussion Papers 03/2014, Deutsche Bundesbank, Research Centre.
  3. Jerry Tsai & Jessica A. Wachter, 2014. "Rare Booms and Disasters in a Multi-sector Endowment Economy," NBER Working Papers 20062, National Bureau of Economic Research, Inc.
  4. Maheu, John M. & McCurdy, Thomas H. & Zhao, Xiaofei, 2013. "Do jumps contribute to the dynamics of the equity premium?," Journal of Financial Economics, Elsevier, vol. 110(2), pages 457-477.

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