Beyond the Bell curve: Investigating jump skewness

GSEM Professor Fabio Trojani, Piotr Orlowski, and Paul Schneider co-authored an article published in the top tier journal Management Science. The study delves into the intricacies of skewness risk premia in financial markets, with a specific focus on S&P 500 index options. It introduces novel trading strategies to dissect and capitalize on skewness risk, emphasizing its distinctiveness from variance premium. By analyzing skewness risk during both trading and non-trading hours, the research uncovers higher premiums when markets are closed and after left-tail market events. Employing a model-free approach, the authors effectively measures and trades skewness risk, avoiding common pitfalls associated with joint hypotheses and misspecification.

Fabio Trojani received funding from the Swiss National Science Foundation and the AXA Chair in Socioeconomic Risks of Financial Markets at the University of Turin.

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-U.S 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.

The study is available open access: On the Nature of (Jump) Skewness Risk Premia

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