Risk Premia: Asymmetric Tail Risks and Excess Returns
Abstract
We present extensive evidence that ``risk premium'' is strongly correlated with tail-risk skewness but very little with volatility. We introduce a new, intuitive definition of skewness and elicit an approximately linear relation between the Sharpe ratio of various risk premium strategies (Equity, Fama-French, FX Carry, Short Vol, Bonds, Credit) and their negative skewness. We find a clear exception to this rule: trend following has both positive skewness and positive excess returns. This is also true, albeit less markedly, of the Fama-French ``Value'' factor and of the ``Low Volatility'' strategy. This suggests that some strategies are not risk premia but genuine market anomalies. Based on our results, we propose an objective criterion to assess the quality of a risk-premium portfolio.
Keywords
Cite
@article{arxiv.1409.7720,
title = {Risk Premia: Asymmetric Tail Risks and Excess Returns},
author = {Y. Lempérière and C. Deremble and T. T. Nguyen and P. Seager and M. Potters and J. P. Bouchaud},
journal= {arXiv preprint arXiv:1409.7720},
year = {2015}
}
Comments
25 pages, 9 Figures, 8 Tables. Revised version after first round of referees