Priced Risk and Asymmetric Volatility in the Cross-Section of Skewness

28 Pages Posted: 9 Mar 2009

See all articles by Robert F. Engle

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Abhishek Mistry

affiliation not provided to SSRN

Date Written: February 2009

Abstract

We investigate the sources of skewness in aggregate risk-factors and the cross-section of stock returns. In an ICAPM setting with conditional volatility, we find theoretical time series predictions on the relationships among volatility, returns, and skewness for priced risk factors. Market returns resemble these predictions; however, size, book-to-market, and momentum factor returns show alternative behavior, leading us to conclude these factors are not priced risks. We link aggregate risk and skewness to individual stocks and find empirically that the risk aversion effect manifests in individual stock skewness. Additionally, we find several firm characteristics that explain stock skewness. Smaller firms, value firms, highly levered firms, and firms with poor credit ratings have more positive skewness.

Suggested Citation

Engle, Robert F. and Mistry, Abhishek, Priced Risk and Asymmetric Volatility in the Cross-Section of Skewness (February 2009). NYU Working Paper No. FIN-08-042. Available at SSRN: https://ssrn.com/abstract=1354529

Robert F. Engle (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Abhishek Mistry

affiliation not provided to SSRN

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