Conditional coskewness and asset pricing

Smith, Daniel R.

doi:10.1016/j.jempfin.2006.04.004

Cited by 109 publications

(49 citation statements)

References 75 publications

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“…From this point on, because multiple indexes are involved, I specify with which market index a beta or coskewness measure is associated, and I use superscripts to denote the relevant market index. Similar multifactor considerations appear in Dittmar (), Vanden (), and Smith () …”

Section: Empirical Modelssupporting

confidence: 70%

“…Motivated by the linear formulation in Smith (), the first three conditional moments are modeled as linear functions of

Z_{j, t - 1} \equiv {true(1 x_{j}^{T} y_{j, t - 1}^{T} z_{t - 1}^{T} true)}^{normalT}

r_{j, t} = δ^{normalT} Z_{j, t - 1} + w_{j, t},

l n true(w_{j, t}^{2} true) = ϕ^{normalT} Z_{j, t - 1} + u_{j, t},

w_{j, t}^{3} = ψ^{normalT} Z_{j, t - 1} + v_{j, t},

where equation models the conditional mean, equation models the logarithm of conditional variance (to avoid a negative fitted variance), and equation models the conditional third central moment. The model for conditional skewness is

\frac{ψ^{normalT} Z_{j, t - 1}}{{(normale normalx normalp [ϕ^{normalT} Z_{j, t - 1} + 0.5 var true(u true)])}^{\frac{3}{2}}} = ξ^{normalT} Z_{j, t - 1} + ϵ_{j, t}^{S},

...…”

Section: Empirical Modelsmentioning

confidence: 99%

“…moments of future returns (see, e.g., Ferson and Harvey 1999;Ferson, Henry, and Kisgen 2006;Smith 2007). 6 Motivated by the linear formulation in Smith (2007), the first three conditional moments are modeled as linear functions of Z j;tÀ1 1 x T j y T j;tÀ1 z T tÀ1 T :…”

Section: Empirical Modelsmentioning

confidence: 99%

“…Although Levy (1969) points out that the domain for wealth is restricted when a cubic approximation is imposed, Arditti (1969) shows that nonincreasing ARA applies to general forms of utility functions and thus is not subject to Levy's critique. in this context. Siddique (1999, 2000), Smith (2007), and Chang, Christoffersen, and Jacobs (2013) all find that conditional coskewness matters in equity returns. Patton (2004) finds conditional skewness matters in forming optimal stock portfolios.…”

mentioning

confidence: 95%

“…Vanden () proposes an “option coskewness model,” which uses the second and third comoments of the equity market and an optimally traded call option to explain expected stock returns in an economy in which agents have piecewise utility functions. Smith () includes coskewness with respect to the market portfolio in some existing multifactor pricing models, but higher moments of other factors are absent.…”

mentioning

confidence: 99%

See 4 more Smart Citations

Skewness and Coskewness in Bond Returns

Chiang

2016

J of Financial Research

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Bond skewness and coskewness (i.e., bond return comovement with market volatility) are both time varying, with cross‐sectional variation driven by maturity and credit rating. Other things being equal, longer maturity bonds have lower skewness, and lower coskewness with respect to the bond market index; lower quality bonds have lower skewness, and higher coskewness with respect to the bond market index. Three‐moment bond alphas (which account for coskewness effects) are time varying and predictable by market default spread. They are significantly different from, and often are closer to zero than, two‐moment alphas (which ignore coskewness effects).

show abstract

Section: Empirical Modelssupporting

confidence: 70%

“…Motivated by the linear formulation in Smith (), the first three conditional moments are modeled as linear functions of

Z_{j, t - 1} \equiv {true(1 x_{j}^{T} y_{j, t - 1}^{T} z_{t - 1}^{T} true)}^{normalT}

r_{j, t} = δ^{normalT} Z_{j, t - 1} + w_{j, t},

l n true(w_{j, t}^{2} true) = ϕ^{normalT} Z_{j, t - 1} + u_{j, t},

w_{j, t}^{3} = ψ^{normalT} Z_{j, t - 1} + v_{j, t},

\frac{ψ^{normalT} Z_{j, t - 1}}{{(normale normalx normalp [ϕ^{normalT} Z_{j, t - 1} + 0.5 var true(u true)])}^{\frac{3}{2}}} = ξ^{normalT} Z_{j, t - 1} + ϵ_{j, t}^{S},

...…”

Section: Empirical Modelsmentioning

confidence: 99%

Section: Empirical Modelsmentioning

confidence: 99%

mentioning

confidence: 95%

mentioning

confidence: 99%

See 3 more Smart Citations

Skewness and Coskewness in Bond Returns

Chiang

2016

J of Financial Research

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show abstract

References

2018

Fundamental Statistical Inference

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A smiling bear in the equity options market and the cross‐section of stock returns

Park

Kim

Shim

2019

Journal of Futures Markets

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We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of risk-neutral tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual US-listed stocks during 2000-2013, we find that the average realized return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate the contribution of informed options trading to price discovery in terms of the realization of tail-risk aversion in the stock market.

show abstract

Conditional coskewness and asset pricing

Cited by 109 publications

References 75 publications

Skewness and Coskewness in Bond Returns

Skewness and Coskewness in Bond Returns

References

A smiling bear in the equity options market and the cross‐section of stock returns

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