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Default risk, macroeconomic conditions, and the market skewness risk premium

Xu, Zhongxiang; Li, Xiafei; Chevapatrakul, Thanaset; Gao, Ning

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Authors

Zhongxiang Xu

Xiafei Li

Thanaset Chevapatrakul

Ning Gao



Abstract

Previous literature finds that stocks with low market skewness risk outperform stocks with high market skewness risk. Using the portfolio sort approach, we show that this market skewness risk premium is much more pronounced among stocks with low default risk or under good economic conditions. The premium vanishes among stocks with high default risk or under poor economic conditions. Further, the market skewness risk is negatively priced only for stocks with low default risk or in good economic times. It is not priced when firm-level default risk is high or when macroeconomic conditions are bad. Our findings suggest that the market skewness risk premium and the pricing of market skewness risk are conditional on both firm-level default risk and country-level macroeconomic conditions. This is because investors’ aversion to default risk and downside market risk changes their attitudes towards positive market skewness risk.

Citation

Xu, Z., Li, X., Chevapatrakul, T., & Gao, N. (2022). Default risk, macroeconomic conditions, and the market skewness risk premium. Journal of International Money and Finance, -. https://doi.org/10.1016/j.jimonfin.2022.102683

Journal Article Type Article
Acceptance Date Jun 6, 2022
Publication Date Oct 1, 2022
Publicly Available Date Jun 2, 2024
Journal Journal of International Money and Finance
Print ISSN 0261-5606
Publisher Elsevier
Pages -
DOI https://doi.org/10.1016/j.jimonfin.2022.102683
Publisher URL https://www.sciencedirect.com/science/article/pii/S0261560622000869?via%3Dihub

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