Template-Type: ReDIF-Paper 1.0
Author-Name: Albert S. (Pete)
Author-X-Name-First: Albert
Author-X-Name-Last: S. (Pete)
Author-Name: Karamfil Todorov
Author-X-Name-First: Karamfil
Author-X-Name-Last: Todorov
Title: The cumulant risk premium
Abstract: We develop a novel methodology to measure the risk premium of higher-order cumulants (closely related to the moments of a distribution) based on leveraged ETFs. We show that the risk premium on these ETFs reflects the difference between physical and risk-neutral cumulants, which we call the cumulant risk premium (CRP). We show that the CRP is different from zero across asset classes (equities, bonds, commodities, currencies, and volatility) and is large in times of stress. We illustrate that highly leveraged strategies are extremely exposed to higher-order cumulants. Our results have implications for hedge funds, factor models, momentum strategies, and options.
Creation-Date: 2023-10
File-URL: https://www.bis.org/publ/work1128.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1128.htm
File-Format: text/html
Number: 1128
Keywords: cumulants, leverage, ETF, factor models, VIX, momentum, options
Classification-JEL: G1, G12, G13, G23
Handle: RePEc:bis:biswps:1128