TY - JOUR
T1 - Default risk, macroeconomic conditions, and the market skewness risk premium
AU - Gao, Ning
AU - Li, Xiafei
AU - Xu, ZhongXiang
AU - Chevapatrakul, Thanaset
PY - 2022/10/1
Y1 - 2022/10/1
N2 - Previous literature finds that stocks with low market skewness risk outperform stocks with high market skewness risk. Using the portfolio sort approach, we show that this market skewness risk premium is much more pronounced among stocks with low default risk or under good economic conditions. The premium vanishes among stocks with high default risk or under poor economic conditions. Further, the market skewness risk is negatively priced only for stocks with low default risk or in good economic times. It is not priced when firm-level default risk is high or when macroeconomic conditions are bad. Our findings suggest that the market skewness risk premium and the pricing of market skewness risk are conditional on both firm-level default risk and country-level macroeconomic conditions. This is because investors’ aversion to default risk and downside market risk changes their attitudes towards positive market skewness risk.
AB - Previous literature finds that stocks with low market skewness risk outperform stocks with high market skewness risk. Using the portfolio sort approach, we show that this market skewness risk premium is much more pronounced among stocks with low default risk or under good economic conditions. The premium vanishes among stocks with high default risk or under poor economic conditions. Further, the market skewness risk is negatively priced only for stocks with low default risk or in good economic times. It is not priced when firm-level default risk is high or when macroeconomic conditions are bad. Our findings suggest that the market skewness risk premium and the pricing of market skewness risk are conditional on both firm-level default risk and country-level macroeconomic conditions. This is because investors’ aversion to default risk and downside market risk changes their attitudes towards positive market skewness risk.
KW - Asset pricing
KW - Positive skewness preference
KW - Market skewness risk premium
KW - Default riskMacroeconomic conditions
KW - State-dependent risk aversion
UR - https://www.cifcm.cn/yjcp/gkfb/202206/20220630/j_2022063015464600016565752233613607.html
U2 - 10.1016/j.jimonfin.2022.102683
DO - 10.1016/j.jimonfin.2022.102683
M3 - Article
SN - 0261-5606
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
ER -