Moment risk premia and the cross-section of stock returns in the European stock market

摘要

This article investigates whether volatility, skewness, and kurtosis risks are priced in the European stock market and assess the signs and the magnitudes of the corresponding risk premia. To this end, we adopt two approaches: a model-free approach based on swap contracts, and a model-based approach built on portfolio-sorting techniques. A number of results are obtained. First, stocks with high exposure to innovations in implied market volatility (skewness) exhibit low (high) returns on average. Second, the estimated premium for bearing market volatility (skewness) risk is negative (positive), robust to the two approaches employed, and statistically and economically significant. Third, in contrast with studies on the US stock market, we identify the existence of a size premium in the European stock market: small capitalization stocks earn higher returns than high capitalization stocks. (C) 2020 Elsevier B.V. All rights reserved.