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On the Nature of (Jump) Skewness Risk Premia

Author

Listed:
  • Piotr Orłowski

    (Department of Finance, HEC Montréal, Montréal, Québec H3T 2A7, Canada; Canadian Derivatives Institute, Montréal, Québec H3T 2A7, Canada)

  • Paul Schneider

    (Department of Finance, Università della Svizzera Italiana, 6900 Lugano, Switzerland)

  • Fabio Trojani

    (Department of Economics, Social Studies, Applied Mathematics, and Statistics, University of Turin, 10124 Turin, Italy; Geneva Finance Research Institute, University of Geneva, 1211 Geneva, Switzerland)

Abstract

Market skewness risk is priced, but the components of its premium are not fully understood. We propose new trading strategies decomposing the skewness risk premium into jump and leverage effect components, and we analyze the skewness risk premia in the market for S&P 500 index options. We find that the skewness premium is higher when markets are closed than during trading hours, consistently with uncertainty resolution patterns by non-U.S investors; that it increases after left-tail market events; and that it is distinct from the variance premium. Moreover, during trading hours, the skewness premium is dominated by priced jump risk.

Suggested Citation

  • Piotr Orłowski & Paul Schneider & Fabio Trojani, 2024. "On the Nature of (Jump) Skewness Risk Premia," Management Science, INFORMS, vol. 70(2), pages 1154-1174, February.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:2:p:1154-1174
    DOI: 10.1287/mnsc.2023.4734
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