The Risk of Skewness and Kurtosis in Oil Market and the Cross-Section of Stock Returns

40 Pages Posted: 10 May 2018 Last revised: 27 May 2018

See all articles by Nima Ebrahimi

Nima Ebrahimi

University of Houston-Department of Finance

Craig Pirrong

University of Houston - Department of Finance

Date Written: April 24, 2018

Abstract

We show that exposure to the risk of kurtosis in oil market drives the cross-section of stock returns from 1996 to 2014. The average monthly difference between the return of portfolio of stocks with low exposure and high exposure to the risk of kurtosis is -0.37%, showing that higher exposure to oil’s kurtosis risk will be penalized by lower average returns. We are able to confirm the significance of kurtosis risk within the statistical framework of Carhart 4-factor model. In contrast to the skewness risk, which is only a significant player in some of the sub-periods, kurtosis risk is keeping its significance through all sub-periods, as well as after taking market moments into account and within different maturities. The significance of the risk of skewness gets more evident moving from shorter to longer maturities. The risk of volatility, which has been shown to be a significant-priced risk in the cross-section of stock returns in literature, loses its significance after controlling for the third and fourth moments.

Keywords: Cross-Section, Skewness Risk, Kurtosis Risk, Portfolio

JEL Classification: G11; G12; G13;Q02

Suggested Citation

Ebrahimi, Nima and Pirrong, Craig, The Risk of Skewness and Kurtosis in Oil Market and the Cross-Section of Stock Returns (April 24, 2018). Available at SSRN: https://ssrn.com/abstract=3168191 or http://dx.doi.org/10.2139/ssrn.3168191

Nima Ebrahimi (Contact Author)

University of Houston-Department of Finance ( email )

Houston, TX
United States
6784687058 (Phone)

HOME PAGE: http://https://www.bauer.uh.edu/search/directory/profile.asp?firstname=Nima&lastname=Ebrahimi

Craig Pirrong

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

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