Skewness Swaps on Individual Stocks
62 Pages Posted: 29 Mar 2018 Last revised: 21 Nov 2020
Date Written: November 20, 2020
This paper implements a novel model-free methodology to measure skewness risk premia in individual stocks. The methodology takes the form of a trading strategy, a skewness swap. The return on the strategy 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. Part 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