Risk Premia: Asymmetric Tail Risks and Excess Returns

25 Pages Posted: 30 Sep 2014

See all articles by Yves Lemperiere

Yves Lemperiere

Capital Fund Management

Cyril Deremble

Capital Fund Management

Trung-Tu Nguyen

Capital Fund Management

Philip Seager

Capital Fund Management

Marc Potters

Capital Fund Management

Jean-Philippe Bouchaud

Capital Fund Management

Date Written: September 29, 2014

Abstract

We present extensive evidence that "Risk Premium" is strongly correlated with tail-risk skewness, but very little with volatility. We introduce a new, intuitive definition of skewness, and elicit a linear relationship between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry, short vol, bonds, credit) and their negative skewness. We find a clear exception to this rule: Trend Following (and perhaps the Fama-French "High minus Low"), that has positive skewness and positive excess return, suggesting that some strategies are not risk premia, but genuine market anomalies. Based on our results, we propose an objective criterion to assess the quality of a risk premium portfolio.

Keywords: Risk Premium, skewness, equity, carry trade

Suggested Citation

Lemperiere, Yves and Deremble, Cyril and Nguyen, Trung-Tu and Seager, Philip and Potters, Marc and Bouchaud, Jean-Philippe, Risk Premia: Asymmetric Tail Risks and Excess Returns (September 29, 2014). Available at SSRN: https://ssrn.com/abstract=2502743 or http://dx.doi.org/10.2139/ssrn.2502743

Yves Lemperiere (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Cyril Deremble

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Trung-Tu Nguyen

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Philip Seager

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

Marc Potters

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 10 (Phone)
+33 1 47 70 17 40 (Fax)

HOME PAGE: http://www.cfm.fr

Jean-Philippe Bouchaud

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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