01 December 2020

Department Seminar by Kyriakopoulou Dimitra, UCLouvain

Department Seminar by Kyriakopoulou Dimitra, UCLouvain

Negative skewness of asset returns with positive time-varying risk premia

Wednesday, 02 December 2020, 15:00-16:15
Presenter: Kyriakopoulou Dimitra , Université catholique de Louvain (UCLouvain)

The marginal distribution of financial time series such as returns is often negatively skewed. We investigate the relation between positive time-varying risk premia and the unconditional skewness of returns. We show that if the error distribution is symmetric, the negative unconditional asymmetry of returns should be the outcome of a negative correlation between their first two conditional moments. Following one of the implications of the intertemporal capital asset pricing model (ICAPM) of Merton (1973), there is a positive and linear relationship between risk and expected returns. Under a fully parametric EGARCH-in-Mean specification, we propose to use an asymmetric error distribution in order to match the unconditional asymmetry of asset returns. Value-at-Risk prediction of the largest stock market indices is performed as an application.

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