Risk Premia: Asymmetric Tail Risks and Excess Returns

Y. Lempérière; C. Deremble; T. T. Nguyen; P. Seager; M. Potters; J. P. Bouchaud

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arXiv · 1409.7720

Risk Premia: Asymmetric Tail Risks and Excess Returns

Y. Lempérière·C. Deremble·T. T. Nguyen·P. Seager·M. Potters·J. P. Bouchaud

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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.

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Y. Lempérière, C. Deremble, T. T. Nguyen, P. Seager, M. Potters, J. P. Bouchaud. 2014-09-26. Risk Premia: Asymmetric Tail Risks and Excess Returns. https://arxiv.org/abs/1409.7720

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