Market Volatility and Skewness Risks in China

I examine the pricing of risk-neutral market volatility and skewness risks in the cross-section of stocks in China. I find that stocks with high exposures to innovations in volatility or skewness exhibit low expected returns. Market volatility and skewness are economically important and command risk premia of 2.33% and 1.72% per month, respectively. In contrast to the US, innovations in volatility (skewness) exhibit less (more) negative contemporaneous correlation with market returns. These relationships provide a hedging explanation for my results. The negative risk premium of volatility is robust to empirical settings, whereas that of skewness is sensitive to testing methods