Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk
51 Pages Posted: 6 Sep 2015 Last revised: 14 Oct 2017
Date Written: October 13, 2017
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: Suggested Citation