Skewness Swaps: Evidence from the Cross-Section of Stocks
57 Pages Posted: 29 Mar 2018 Last revised: 12 Aug 2021
Date Written: August 12, 2021
This paper studies the skewness risk premia in individual stocks using skewness swaps. Skewness swaps are trading strategies in which an investor buys the stock's risk-neutral skewness and receives as payoff the realized skewness of the stock. The strategy's return, which measures the skewness risk premium, shows a significant positive skewness risk premium in individual stocks. The risk premium massively increased after the 2008/2009 financial crisis due to an increase in the price of put options in individual stocks. A large portion of this skewness risk premium is idiosyncratic. Frictions on short-selling, measured by high short-interest ratios and low ETF ownership, are key drivers of the idiosyncratic skewness risk premium.
Keywords: Skewness risk premium, skewness swap, financial crisis, short-selling constraints
JEL Classification: G01, G12, G13
Suggested Citation: Suggested Citation