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Risk Premia: Asymmetric Tail Risks and Excess Returns

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  • Y. Lemp'eri`ere
  • C. Deremble
  • T. T. Nguyen
  • P. Seager
  • M. Potters
  • J. P. Bouchaud

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.

Suggested Citation

  • Y. Lemp'eri`ere & C. Deremble & T. T. Nguyen & P. Seager & M. Potters & J. P. Bouchaud, 2014. "Risk Premia: Asymmetric Tail Risks and Excess Returns," Papers 1409.7720, arXiv.org, revised Oct 2015.
    • Handle: RePEc:arx:papers:1409.7720
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    References listed on IDEAS

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    Cited by:

    1. Jean‐Philippe Bouchaud & Philipp Krüger & Augustin Landier & David Thesmar, 2019. "Sticky Expectations and the Profitability Anomaly," Journal of Finance, American Finance Association, vol. 74(2), pages 639-674, April.

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