Market volatility and skewness risks in China

Abstract

We examine the pricing of the risk-neutral market volatility and skewness risks in the cross-section of stocks in China. We find that stocks with high exposures to innovations in volatility or skewness exhibit low expected returns. Market volatility is economically important and commands a notably high risk premium. Compared to the US, innovations in volatility (skewness) exhibit less (more) negative contemporaneous correlation with market returns. These relationships provide a hedging explanation for our results. The negative risk premium of volatility is robust to empirical settings, whereas that of skewness is related to market risk and sensitive to testing methods.