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The Skew Risk Premium in the Equity Index Market

Kozhan, R., Neuberger, A. and Schneider, P. (2013). The Skew Risk Premium in the Equity Index Market. The Review of Financial Studies, 26(9), pp. 2174-2203. doi: 10.1093/rfs/hht039

Abstract

We develop a new method for measuring moment risk premiums. We find that the skew premium accounts for over 40% of the slope in the implied volatility curve in the S&P 500 market. Skew risk is tightly related to variance risk, in the sense that strategies designed to capture the one and hedge out exposure to the other earn an insignificant risk premium. This provides a new testable restriction for asset pricing models trying to capture, in particular, disaster risk premiums. We base our results on a general trading strategy by replicating contracts that swap implied for realized conditional asset moments.

Publication Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Financial Studies following peer review. The version of record Kozhan, R., Neuberger, A. & Schneider, P. (2013). The Skew Risk Premium in the Equity Index Market. The Review of Financial Studies, 26(9), pp. 2174-2203. is available online at: http://dx.doi.org/10.1093/rfs/hht039
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/15209
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