The Crash Risk in Individual Stocks Embedded in Skewness Swap Returns

69 Pages Posted: 29 Mar 2018 Last revised: 30 Oct 2023

See all articles by Paola Pederzoli

Paola Pederzoli

University of Houston - C.T. Bauer College of Business

Date Written: October 28, 2023

Abstract

This paper investigates crash risk premiums in individual stocks using skewness swaps. These swaps involve buying a stock's risk-neutral skewness and receiving the realized skewness as a payoff. The strategy's returns, which measure the skewness risk premium, are found to be consistently large and positive. This suggests investors are concerned about potential crashes in individual stocks and require substantial compensation for bearing this risk. Notably, significant results are mainly observed after the 2007/2009 financial crisis, indicating changes in post-crisis option market dynamics. Key determinants of skewness swap returns include stock overvaluation metrics and the prolonged low interest rate environment post-crisis.

Keywords: Skewness risk premium, skewness swap, financial crisis

JEL Classification: G01, G12, G13

Suggested Citation

Pederzoli, Paola, The Crash Risk in Individual Stocks Embedded in Skewness Swap Returns (October 28, 2023). Swiss Finance Institute Research Paper No. 18-31, Paris December 2018 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=3151975 or http://dx.doi.org/10.2139/ssrn.3151975

Paola Pederzoli (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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