Low-Risk Anomalies?

Abstract

This paper shows that low-risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option-implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor-mimicking portfolios. Controlling for skewness renders the alphas of betting-against-beta and betting-against-volatility insignificant. We also show that the returns of beta- and volatility-sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness.