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Title: The market price of skewness and limits to arbitrage Authors:  Paola Pederzoli - University of Geneva Swiss Finance Institute (Switzerland) [presenting]
Abstract: A new measure of skewness is provided which estimates the third moment of asset returns while being independent from the first, second and fourth moment. A numerical study assesses the precision of the methodology. Our skewness measure can be traded directly on American options in a form of skewness swap, in which the investor exchanges the risk neutral skewness of the asset (Q skewness) with the realised skewness (P skewness). We implement the skewness swaps on all the constituents of the SP100 separately and we find that there is a positive and significant skewness risk premium in the single stock equity market, in particular after the 2007-2009 financial crisis. We find a strong dependence between the Q skewness and the ratio between the trading volumes of the out-of-the-money calls and out-of-the-money puts. We find that market makers increase the prices of the most traded category of options because they are exposed to more risks and costs in that category, in accordance to a limit to arbitrage hypothesis.