On the Nature of (Jump) Skewness Risk Premia - new publication by Fabio Trojani
Market skewness risk is priced but the components of its premium are not fully understood.
A new study by GFRI's professor Fabio Trojani proposes new trading strategies decomposing the skewness risk premium into jump and leverage effect components, and analyzes the skewness risk premia in the market for S&P 500 index options. The authors 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.
The paper is co-authored with Prof. Trojani's former PHD student Piotr Orlowski and with Paul Schneider, and is forthcoming in the prestigious Management Science journal.
May 23, 2022