Market Skewness Risk and the Cross Section of Stock Returns

Bo Young Chang, Peter F. Christoffersen, Kris Jacobs

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalJournal of Financial Economics
Volume107
Issue number1
Pages (from-to)46-68
ISSN0304-405X
DOIs
Publication statusPublished - Jan 2013

Keywords

  • Skewness Risk
  • Cross Section
  • Volatility Risk
  • Option-Implied Moments
  • Factor-Mimicking Portfolios

Cite this

@article{3e048cf78ed1428abe5c1e9b964757bf,
title = "Market Skewness Risk and the Cross Section of Stock Returns",
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.",
keywords = "Skewness Risk, Cross Section, Volatility Risk, Option-Implied Moments, Factor-Mimicking Portfolios",
author = "{Young Chang}, Bo and Christoffersen, {Peter F.} and Kris Jacobs",
year = "2013",
month = "1",
doi = "10.1016/j.jfineco.2012.07.002",
language = "English",
volume = "107",
pages = "46--68",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "1",

}

Market Skewness Risk and the Cross Section of Stock Returns. / Young Chang, Bo; Christoffersen, Peter F.; Jacobs, Kris.

In: Journal of Financial Economics, Vol. 107, No. 1, 01.2013, p. 46-68.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Market Skewness Risk and the Cross Section of Stock Returns

AU - Young Chang, Bo

AU - Christoffersen, Peter F.

AU - Jacobs, Kris

PY - 2013/1

Y1 - 2013/1

N2 - 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.

AB - 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.

KW - Skewness Risk

KW - Cross Section

KW - Volatility Risk

KW - Option-Implied Moments

KW - Factor-Mimicking Portfolios

U2 - 10.1016/j.jfineco.2012.07.002

DO - 10.1016/j.jfineco.2012.07.002

M3 - Journal article

VL - 107

SP - 46

EP - 68

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 1

ER -