N° 19-31: On the Nature of (Jump) Skewness Risk Premia

We propose a model-free method for measuring the jump skewness risk premium via a trading strategy. We find that in the S&P 500 option market, the premium is positive and greater in absolute terms than the variance premium, and that both vary considerably between trading and non-trading periods. The return on jump skewness is not spanned by other systematic risk factors, suggesting it is a systematic risk factor itself. We decompose return skewness into a jump component, and a signed variance component, and demonstrate that only the jump component is priced. Our work provides new benchmarks for option-pricing models.