Risk Premia: Asymmetric Tail Risks and Excess Returns

Y. Lemp\'eri\`ere, C. Deremble, T. T. Nguyen, P. Seager, M. Potters and 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.

Date: 2014-09, Revised 2015-10
New Economics Papers: this item is included in nep-rmg
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