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    Frankfurt a. M.: Goethe University, Center for Financial Studies (CFS)
    Publication Date: 2017-12-19
    Description: This paper shows theoretically and empirically that beta- and volatility-based low risk anomalies are driven by return skewness. The empirical patterns con- cisely match the predictions of our model which generates skewness of stock returns via default risk. With increasing downside risk, the standard capital as- set pricing model increasingly overestimates required equity returns relative to firms' true (skew-adjusted) market risk. Empirically, the profitability of betting against beta/volatility increases with firms' downside risk. Our results suggest that the returns to betting against beta/volatility do not necessarily pose asset pricing puzzles but rather that such strategies collect premia that compensate for skew risk.
    Keywords: ddc:330 ; low risk anomaly ; skewness ; credit risk ; risk premia ; equity options
    Repository Name: EconStor: OA server of the German National Library of Economics - Leibniz Information Centre for Economics
    Language: English
    Type: doc-type:workingPaper
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