Abstract

This paper implements a novel model-free methodology to measure skewness risk premia in individual stocks. The methodology takes the form of a trading strategy, a skewness swap. The return on the strategy shows a significant positive skewness risk premium in individual stocks. The risk premium massively increased after the 2008/2009 financial crisis due to an increase in the price of put options in individual stocks. Part of this skewness risk premium is idiosyncratic. Frictions on short-selling, measured by high short-interest ratios and low ETF ownership, are key drivers of the idiosyncratic skewness risk premium.

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