Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk

51 Pages Posted: 6 Sep 2015 Last revised: 14 Oct 2017

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Mathieu Fournier

HEC Montreal

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Mehdi Karoui

OMERS

Date Written: October 13, 2017

Abstract

We show that the prices of risk for factors that are nonlinear in the market return are readily obtained using index option prices. The price of co-skewness risk corresponds to the market variance risk premium, and the price of co-kurtosis risk corresponds to the market skewness risk premium. Option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An out-of-sample analysis of factor models with co-skewness and co-kurtosis risk indicates that the new estimates of the price of risk improve the models' performance compared to regression-based estimates.

Keywords: Co-skewness, co-kurtosis, risk premia, options, cross-section, out-of-sample

JEL Classification: G12, G13, G17

Suggested Citation

Christoffersen, Peter and Fournier, Mathieu and Jacobs, Kris and Karoui, Mehdi, Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk (October 13, 2017). Rotman School of Management Working Paper No. 2656412. Available at SSRN: https://ssrn.com/abstract=2656412 or http://dx.doi.org/10.2139/ssrn.2656412

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Mathieu Fournier

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3 H3T 2A7
Canada

Kris Jacobs (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Mehdi Karoui

OMERS ( email )

200 Bay Street, Suite 2300
Toronto, Ontario M5J2J2
Canada

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