On the Nature of (Jump) Skewness Risk Premia

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. This paper was accepted by Kay Giesecke, finance. Funding: P. Orłowski acknowledges financial support from the Doc.Mobility program of the Swiss National Science Foundation [Project P1TIP1_161875 “Option portfolio returns and dispersion”]. P. Schneider acknowledges financial support from the Swiss National Science Foundation [Projects 169582 “Model-free asset pricing” and 189086 “Scenarios”]. F. Trojani and P. Orłowski acknowledge financial support from the Swiss National Science Foundation [Project 150198 “Higher order robust resampling and multiple testing methods”] and the Swiss Finance Institute [Project “Term structures and cross-sections of asset risk premia”]. F. Trojani gratefully acknowledges support from the AXA Chair in Socioeconomic Risks of Financial Markets at the University of Turin. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4734 .