This paper characterizes the equilibrium demand and risk premiums in the presence of skewness risk. We extend the classical mean-variance two-fund separation theorem to a three-fund separation theorem. The additional fund is the skewness portfolio, i.e. a portfolio that gives the optimal hedge...

This paper analyses what determines an individual investor's risk-sharing demand for options and, aggregating across investors, what the equilibrium demand for options. We find that agents trade options to achieve their desired skewness; specifically, we find that portfolio holdings boil down to...