The Skewness Risk Premium:Characteristics And Information Content

Skewness Risk Premium was measured by the difference between Realized Skewness and Risk-Neutral Skewness, which contained abundant information. This paper checked the skewness risk premium in Taiwan Market by using TXO option prices through a technique called skewness swap. By using this model-free method, we got risk-neutral skewness and realized skewness at the same time. Then we studied the characteristics of skewness risk premium as well as its information content.This paper firstly analyzed the characteristics of skewness risk premium and found that there was a significantly positive skewness risk premium in Taiwan market. The correlation between skewness risk premium and risk-neutral skewness was as high as-0.94. And the term structure of skewness risk premium did not show an obvious trend.Then we investigated the information content of skewness risk premium from three aspects. We found that skewness risk premium was a new pricing factor differed from market factor, which had significant explanation power on cross-section returns. And there was a significantly negative relationship between skewness risk premium and investor sentiment. What’s more, skewness risk premium contained the tail risk information, but it could not make a precise prediction on segmentation of tail risk. We also changed the measurement of tail risk to do a robust test.This paper was the first comprehensive study on the relationship between skewness risk premium and investor sentiment as well as segmentation of tail risk. Our study filled the research gap on emerging market about skewness risk premium, which also provided reference for mainland financial markets research.