Abstract
This paper shows that stocks' CAPM alphas are negatively related to CAPM betas if investors demand compensation for negative skewness. Thus, high (low) beta stocks appear to underperform (outperform). This apparent anomaly merely reflects compensation for residual coskewness ignored by the CAPM. Empirically, we find that option-implied ex-ante skewness is strongly related to ex-post residual coskewness and alphas. Beta- and volatility-based low risk anomalies are largely driven by a single principal component, which is in turn largely explained by skewness. Controlling for skewness renders the alphas of betting-against-beta and -volatility insignificant.
| Original language | English |
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| Publication date | 2017 |
| Number of pages | 72 |
| DOIs | |
| Publication status | Published - 2017 |
| Event | The 77th Annual Meeting of American Finance Association. AFA 2017 - Sheraton Grand Chicago, Chicago, United States Duration: 6 Jan 2017 → 8 Jan 2017 Conference number: 77 http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html |
Conference
| Conference | The 77th Annual Meeting of American Finance Association. AFA 2017 |
|---|---|
| Number | 77 |
| Location | Sheraton Grand Chicago |
| Country | United States |
| City | Chicago |
| Period | 06/01/2017 → 08/01/2017 |
| Internet address |
Keywords
- Low risk anomaly
- Skewness
- Risk premia
- Equity options