Cross-Asset Skew

32 Pages Posted: 8 Jan 2020

See all articles by Nick Baltas

Nick Baltas

Imperial College Business School; Goldman Sachs International

Gabriel Salinas

Teacher Retirement System of Texas

Date Written: December 16, 2019

Abstract

We find that realized skewness is a significant indicator of returns across a range of assets from different asset classes, namely commodities, government bonds, equity indices and currencies. Taking on skewness risk is broadly compensated within, but more substantially across asset classes. Portfolios in these four asset classes with long positions on most negatively (or least positively) skewed assets and short positions on least negatively (or most positively) skewed assets generate on average a Sharpe ratio of 0.35 between 1990 and 2017. We find little evidence of a common risk driver among these portfolios, to the extent that their combination benefits substantially from diversification, delivering a Sharpe ratio of 0.72. The patterns are not subsumed by other known factors that drive returns, such as value, momentum or carry factors and, consequently, mean-variance efficient multi-factor portfolios assign a positive weight to skewness. Our results remain robust to different measures of skewness and across sub-samples.

Keywords: asset pricing, behavioral finance, skewness, factor premium, skewness preferences, risk preferences, currencies, commodities, bonds

JEL Classification: G02, G12, G13, G15

Suggested Citation

Baltas, Nick and Salinas, Gabriel, Cross-Asset Skew (December 16, 2019). Available at SSRN: https://ssrn.com/abstract=3505422 or http://dx.doi.org/10.2139/ssrn.3505422

Nick Baltas (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London, SW7 2AZ
United Kingdom

Goldman Sachs International

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom

Gabriel Salinas

Teacher Retirement System of Texas ( email )

816 Congress Ave
Suite 1300
Austin, TX 78701
United States

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