Crash Risk in Individual Stocks
63 Pages Posted: 29 Mar 2018 Last revised: 12 Dec 2018
Date Written: December 6, 2018
In this paper I study and implement skewness swaps in individual stocks, which are trading strategies closely related to the more familiar variance swaps. Just as variance swap returns measure the variance risk premium, skewness swap returns measure the skewness risk premium. I document that (i) the returns of the skewness swaps in individual stocks are positive and significant (ii) after the 2008/2009 financial crisis the returns of the skewness swaps on individual stocks increase substantially while the return of the skewness swap on the market index does not change. The result is robust for different measures of skewness and it is not driven by the difference in option data availability and liquidity between the index and individual stocks. This result provides evidence of a new idiosyncratic skewness risk priced in individual stock. I finally discuss different possible explanations for this pattern.
Keywords: Skewness risk premium, financial crisis, short-selling constraints
JEL Classification: G01, G12, G13
Suggested Citation: Suggested Citation