Abstract

http://ssrn.com/abstract=1571700
 
 

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The Skew Risk Premium in the Equity Index Market


Roman Kozhan


University of Warwick, Warwick Business School

Anthony Neuberger


University of Warwick - Warwick Business School

Paul Schneider


University of Lugano - Institute of Finance; Swiss Finance Institute

November 27, 2012

Review of Financial Studies (2013), 26, 2174-2203
AFA 2011 Denver Meetings Paper

Abstract:     
We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between the skew in implied volatility and realized skew. Like the variance swap, the skew swap corresponds to a trading strategy, necessary to assess risk premia in a model-free way. We find that almost half of the implied volatility skew can be explained by the skew risk premium. We provide evidence that skew and variance premia are manifestations of the same underlying risk factor in the sense that strategies designed to exploit one of the risk premia but to hedge out the other make zero excess returns.

Number of Pages in PDF File: 34

Keywords: skew risk premium, variance risk premium, index options

JEL Classification: G10, G12, G13

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Date posted: March 18, 2010 ; Last revised: October 4, 2014

Suggested Citation

Kozhan, Roman and Neuberger, Anthony and Schneider, Paul, The Skew Risk Premium in the Equity Index Market (November 27, 2012). Review of Financial Studies (2013), 26, 2174-2203; AFA 2011 Denver Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1571700 or http://dx.doi.org/10.2139/ssrn.1571700

Contact Information

Roman Kozhan
University of Warwick, Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
Anthony Neuberger
University of Warwick - Warwick Business School ( email )
Coventry CV4 7AL
United Kingdom
Paul Georg Schneider (Contact Author)
University of Lugano - Institute of Finance ( email )
Via Buffi 13
CH-6900 Lugano
Switzerland
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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