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Risk Prudence Premia

Author

Listed:
  • Fabio Girardi

    (Vienna University of Economics and Business - Department of Finance, Accounting & Statistics; Vienna Graduate School of Finance (VGSF))

  • Paul Schneider

    (University of Lugano - Institute of Finance; Swiss Finance Institute)

Abstract

We attribute the coskewness premium in the cross-section of equity portfolios, the negative variance risk premium, and the downward-sloping implied volatility skew to one common source, risk prudence, the aversion to downside risk. The discount factor in a minimum-divergence economy with skew-normal factor payoffs delivers this dependence through a single parameter. A decomposition into a symmetric and a downside-risk channel yields their prices of risk, estimated on U.S. characteristic-managed portfolios. The estimates have the signs the model predicts in the cross-section and in index and sector-fund options.

Suggested Citation

  • Fabio Girardi & Paul Schneider, 2026. "Risk Prudence Premia," Swiss Finance Institute Research Paper Series 26-68, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2668
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