Macroeconomic risk and higher-moment risk premia

52 Pages Posted: 16 Oct 2019 Last revised: 11 Jun 2020

See all articles by Ian Khrashchevskyi

Ian Khrashchevskyi

Stockholm Business School, Stockholm University

Date Written: June 11, 2020

Abstract

In this paper I investigate the relation between macroeconomic risk and higher-moment risk premia. I use existing methodology on higher-moment swaps and estimate the excess returns for variance and skewness swaps. I also introduce new methodology for kurtosis swaps. The expected excess returns on such swaps are interpreted as higher-moment risk premia. I find evidence supporting an increase in tail risk when variance is low and expectations about economic growth are positive. In such periods higher-moment swaps act as a hedge against elevated tail risk, and buyers of such swaps accept lower returns, while sellers of the swaps collect higher-moment risk premia. I find evidence supporting a common source for higher-moment risk premia and that macroeconomic risk could propagate through this source. Finally, I present evidence that higher-moment swaps are good candidates for hedging macroeconomic risk due to higher payoffs when expectations about growth are negative

Keywords: Higher-moment risk premia, Macroeconomic Nowcasting, Derivatives, Hedging

JEL Classification: G10, G12, G13

Suggested Citation

Khrashchevskyi, Ian, Macroeconomic risk and higher-moment risk premia (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=3465468 or http://dx.doi.org/10.2139/ssrn.3465468

Ian Khrashchevskyi (Contact Author)

Stockholm Business School, Stockholm University ( email )

Sweden

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