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Market skewness risk and the cross section of stock returns

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Listed author(s):
  • 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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File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12001523
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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
DOI: 10.1016/j.jfineco.2012.07.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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

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Find related papers by JEL classification:
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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