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International crash risk premium

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  • Chen, Steven Shu-Hsiu

Abstract

This paper investigates the international crash risk and the cross-section of stock index returns. We use the ex-ante model-free negative skewness measured by country-specific index options, proposed in Bakshi et al. (2003), as a proxy of the crash risk. We find that a country’s stock index with a high crash risk relates to a higher stock return as a risk premium across countries. The international crash risk premium exists robustly after controlling for volatility risk, macroeconomic variables, sensitivities to the international risk factors, and realized return moments. In contrast, other international risk premiums do not exist based on the exposure of such control variables. Based on the crash risk premium, we construct international stock trading strategies by sorting option-implied skewness across countries that outperform benchmark strategies by sorting the above control variables.

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  • Chen, Steven Shu-Hsiu, 2024. "International crash risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:intfin:v:94:y:2024:i:c:s1042443124000805
    DOI: 10.1016/j.intfin.2024.102014
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    Keywords

    International stock markets; Crash risk; Index options; Option-implied moments; Trading strategies;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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