Abstract
In this paper, we study the skewness risk and its return predictability in the energy market. Skewness risk is often used to measure the possibility of market crash. We study both physical skewness (market skewness and cross-sectional average realized skewness) estimated from underlying stock returns and risk-neutral skewness evaluated from the options market. We find a significant positive relationship between one-month-ahead market return and average realized skewness in the energy market. This unique feature should be noted by investors and carefully considered by energy policymakers.
Highlights
The change in the energy market condition reflects economic shocks that are often captured by the skewness of energy-related asset returns during times of massive oil price movement
Market participants should pay attention to the effect of the skewness of energy stock prices, as the relationship between the skewness of energy return and equity premium from other assets enables investors to form more diverse equity portfolios by using energy-related assets to hedge against risks
Policymakers could make use of our findings when forming effective hedging strategies to mitigate the impact of oil price shocks on energy-related stocks
Summary
The change in the energy market condition reflects economic shocks that are often captured by the skewness of energy-related asset returns during times of massive oil price movement. Skewness risk is often used to measure the possibility of a market crash. Studying the skewness or crash risk in predicting future returns has been extensively explored at the individual and market level in the existing literature. A large volume of research has been carried out on studying skewness risk, there have been a limited number of empirical investigations into the relationship between skewness risk and energy-related equity returns; studying the crash risk in the energy market, which captures the aggregate sensitivity of individual energy stocks returns concerning their price changes over time, is our important current work 2016; Da Fonseca and Xu 2017; Long et al 2019; Atilgan et al 2019). a large volume of research has been carried out on studying skewness risk, there have been a limited number of empirical investigations into the relationship between skewness risk and energy-related equity returns; studying the crash risk in the energy market, which captures the aggregate sensitivity of individual energy stocks returns concerning their price changes over time, is our important current work
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
