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Conference Paper: The relation between physical and risk-neutral cumulants

TitleThe relation between physical and risk-neutral cumulants
Authors
KeywordsSkewness swap
Kurtosis swap
Equity risk premium
Skewness risk premium
Variance risk premium
Kurtosis risk premium
Issue Date2009
PublisherFinancial Management Association.
Citation
The 2009 Annual Meeting of the Financial Management Association (FMA), Reno, NV., 21-24 October 2009. How to Cite?
AbstractVariance swaps are natural instruments for investors taking directional bets on volatility and are often used for portfolio protection. But the crucial observation suggests that derivative professionals may desire to hedge beyond volatility risk and there exists the need to hedge higher-moment market risks, such as skewness and kurtosis risks. We propose new derivative contracts: skewness swap and kurtosis swap, which trade the forward realized third and fourth cumulants. Using S&P 500 index options data from 1996 to 2005, we document the returns of these swap contracts, i.e., skewness risk premium and kurtosis risk premium. We find that the skewness risk premium is significantly negative and kurtosis risk premium for 90 day maturity is significantly positive.
Persistent Identifierhttp://hdl.handle.net/10722/114912

 

DC FieldValueLanguage
dc.contributor.authorChang, ECen_HK
dc.contributor.authorZhang, EJen_HK
dc.contributor.authorZhao, Hen_HK
dc.date.accessioned2010-09-26T05:21:38Z-
dc.date.available2010-09-26T05:21:38Z-
dc.date.issued2009en_HK
dc.identifier.citationThe 2009 Annual Meeting of the Financial Management Association (FMA), Reno, NV., 21-24 October 2009.-
dc.identifier.urihttp://hdl.handle.net/10722/114912-
dc.description.abstractVariance swaps are natural instruments for investors taking directional bets on volatility and are often used for portfolio protection. But the crucial observation suggests that derivative professionals may desire to hedge beyond volatility risk and there exists the need to hedge higher-moment market risks, such as skewness and kurtosis risks. We propose new derivative contracts: skewness swap and kurtosis swap, which trade the forward realized third and fourth cumulants. Using S&P 500 index options data from 1996 to 2005, we document the returns of these swap contracts, i.e., skewness risk premium and kurtosis risk premium. We find that the skewness risk premium is significantly negative and kurtosis risk premium for 90 day maturity is significantly positive.-
dc.languageengen_HK
dc.publisherFinancial Management Association.-
dc.relation.ispartofAnnual Meeting of the Financial Management Associationen_HK
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectSkewness swap-
dc.subjectKurtosis swap-
dc.subjectEquity risk premium-
dc.subjectSkewness risk premium-
dc.subjectVariance risk premium-
dc.subjectKurtosis risk premium-
dc.titleThe relation between physical and risk-neutral cumulantsen_HK
dc.typeConference_Paperen_HK
dc.identifier.emailChang, EC: ecchang@business.hku.hken_HK
dc.identifier.emailZhang, EJ: jinzhang@hku.hken_HK
dc.identifier.emailZhao, H: zhaohm@gmail.comen_HK
dc.identifier.authorityChang, EC=rp01050en_HK
dc.identifier.authorityZhang, EJ=rp01125en_HK
dc.description.naturepostprint-
dc.identifier.hkuros168637en_HK
dc.description.otherThe 2009 Annual Meeting of the Financial Management Association (FMA), Reno, NV., 21-24 October 2009.-

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