N°18-31: The Crash Risk in Individual Stocks Embedded in Skewness Swap Returns

This paper investigates crash risk premiums in individual stocks using skewness swaps. These swaps involve buying a stock's risk-neutral skewness and receiving the realized skewness as a payoff. The strategy's returns, which measure the skewness risk premium, are found to be consistently large and positive. This suggests investors are concerned about potential crashes in individual stocks and require substantial compensation for bearing this risk. Notably, significant results are mainly observed after the 2007/2009 financial crisis, indicating changes in post-crisis option market dynamics. Key determinants of skewness swap returns include stock overvaluation metrics and the prolonged low interest rate environment post-crisis.