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...

Risk aversion functions extracted from observed stock and option prices can be negative, as shown by Aït-Sahalia and Lo (2000), Journal of Econometrics 94: 9--51; and Jackwerth (2000), The Review of Financial Studies 13(2), 433--51. We rationalize this puzzle by a lack of conditioning on latent...

I derive pricing kernels in which the market volatility is endogenously determined. Using the Taylor expansion series of the representative investor's marginal utility, I show that the price of market volatility risk is restricted by the investor's risk aversion and skewness preference. The risk...

We develop a strategy for utilizing higher moments, variance risk premia, and conditioning information efficiently, and hence improve on the variance bounds computed by Hansen and Jagannathan (1991); Gallant, Hansen, and Tauchen (1990); and Bekaert and Liu (2004). Our bounds reach existing...

This paper proposes a generalized measure of riskiness that nests the original measures pioneered by Aumann and Serrano (Aumann, R. J., R. Serrano. 2008. An economic index of riskiness. J. Political Econom. 116(5) 810-836) and Foster and Hart (Foster, D. P., S. Hart. 2009. An operational measure...

In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attributes of asset...

I use Stochastic Discount Factors to examine the sources of the idiosyncratic volatility premium. I find that non-zero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. The firm's non-systematic coskewness measures the comovement of the...