50 Pages Posted: 15 Apr 2011 Last revised: 13 Mar 2012
Date Written: March 12, 2012
The third moment of returns is important for asset pricing. But skewness, particularly of long horizon returns, is hard to measure precisely. In the case of the second moment, the measurement problem is addressed through the use of realized volatility. This paper proposes an analogous definition of the realized third moment that is computed from high frequency returns, and provides an unbiased estimate of the third moment of long horizon returns. The realized skewness of index returns is shown to be predictable and time varying. The skewness of index returns increases with the length of the horizon (at least up to one year).
Keywords: Skewness, realized volatility, realized variance, skew swap, variance swap
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