On the Nature of (Jump) Skewness Risk Premia

66 Pages Posted: 6 Jun 2019 Last revised: 23 Feb 2022

See all articles by Piotr Orłowski

Piotr Orłowski

HEC Montréal

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Fabio Trojani

University of Geneva; University of Turin - Department of Statistics and Applied Mathematics; Swiss Finance Institute

Date Written: November 29, 2020

Abstract

Market skewness risk is priced but the components of its premium are not fully understood. We propose new trading strategies decomposing the skewness risk premium into jump and leverage effect components, and we analyze the skewness risk premia in the market for S\&P 500 index options. We find that the skewness premium is higher when markets are closed than during trading hours, consistently with uncertainty resolution patterns by non-US investors; that it increases after left-tail market events and that it is distinct from the variance premium. Moreover, during trading hours, the skewness premium is dominated by priced jump risk.

Keywords: skewness premium, jump risk, index options, high-frequency data, VIX

JEL Classification: G10, G12, C58

Suggested Citation

Orłowski, Piotr and Schneider, Paul Georg and Trojani, Fabio, On the Nature of (Jump) Skewness Risk Premia (November 29, 2020). Swiss Finance Institute Research Paper No. 19-31, Available at SSRN: https://ssrn.com/abstract=3391998 or http://dx.doi.org/10.2139/ssrn.3391998

Piotr Orłowski (Contact Author)

HEC Montréal ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Paul Georg Schneider

University of Lugano - Institute of Finance ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Fabio Trojani

University of Geneva ( email )

Geneva, Geneva
Switzerland

University of Turin - Department of Statistics and Applied Mathematics ( email )

Piazza Arbarello, 8
Turin, I-10122
Italy

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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