Abstract
This paper estimates the variance risk premium (VRP) and the skew risk premium (SRP) for the individual stocks and indexes in the US financial markets, and then further analyzes the determinants of the cross-sectional variations of (i) the VRP and SRP for 40 indexes and stocks, (ii) the average VRP and SRP for a representative set of portfolios sorted by the VRP and SRP betas, and (iii) the future variance and skew risk premia. We find that (i) most of the stocks and indexes have negative and significant variance and skew risk premia; (ii) the default premium (DEF) is the key risk factor in the cross-sectional variation of average SRP payoffs; and (iii) there is a negative and statistically significant relation between the future SRP and the lottery demand factor (MAX).
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