Skewness Swaps: Evidence from the Cross-Section of Stocks

Abstract

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