The Skew Risk Premium in the Equity Index Market

34 Pages Posted: 18 Feb 2015

See all articles by Roman Kozhan

Roman Kozhan

University of Warwick - Warwick Business School

Anthony Neuberger

City University London - Faculty of Finance

Paul Schneider

University of Lugano - Institute of Finance; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: November 27, 2012

Abstract

We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between the skew in implied volatility and realized skew. Like the variance swap, the skew swap corresponds to a trading strategy, necessary to assess risk premia in a model-free way. We find that almost half of the implied volatility skew can be explained by the skew risk premium. We provide evidence that skew and variance premia are manifestations of the same underlying risk factor in the sense that strategies designed to exploit one of the risk premia but to hedge out the other make zero excess returns.

Suggested Citation

Kozhan, Roman and Neuberger, Anthony and Schneider, Paul Georg, The Skew Risk Premium in the Equity Index Market (November 27, 2012). WBS Finance Group Research Paper No. 228, Available at SSRN: https://ssrn.com/abstract=2565731 or http://dx.doi.org/10.2139/ssrn.2565731

Roman Kozhan (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Anthony Neuberger

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
182
Abstract Views
4,141
Rank
7,249
PlumX Metrics