On the Nature of (Jump) Skewness Risk Premia

73 Pages Posted: 6 Jun 2019 Last revised: 28 Jul 2021

See all articles by Piotr Orłowski

Piotr Orłowski

HEC Montréal

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: November 29, 2020

Abstract

We propose a model-free method for measuring the jump skewness risk premium via a trading
strategy. We find that in the S&P 500 option market, the premium is positive and greater in
absolute terms than the variance premium. The trading strategy allows for examining the premium
in different holding periods: daytime, when markets are open, and overnight, outside of trading
hours. We demonstrate that both premia vary considerably between trading and non-trading
periods, and also increase in periods of market distress. The daytime return on jump skewness is
not spanned by other systematic risk factors, suggesting it is a systematic risk factor itself. Outside
of trading hours, skewness risk does not seem to be distinguishable from variance risk. We also
decompose total return skewness into a jump component, and a signed variance component, and
demonstrate that only the jump component is priced. Our work also sketches a new set of stylized
facts about variance and jump skewness premia that option pricing models should match.

Keywords: market crashes, jump risk premium, options, high-frequency data

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

Swiss Finance Institute ( email )

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

University of Geneva ( email )

Geneva, Geneva
Switzerland

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