Realized divergence gauges the distinct realized moments associated with time-varying uncertainty and is tradeable with divergence swaps engineered from delta-hedged option portfolios. Consistently with established notions of symmetry in arbitrage-free option markets, implied divergence...

This paper shows theoretically and empirically that beta- and volatility-based low risk anomalies are driven by return skewness. The empirical patterns con- cisely match the predictions of our model which generates skewness of stock returns via default risk. With increasing downside risk, the...

We investigate optimal trading strategies under uncertainty in a nonparametric no-arbitrage framework that is consistent with an arbitrary number of assets. We show that extreme aversion to uncertainty precludes trading, and that preference for uncertainty induces market participation. In an...

We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of...

We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between...

We measure the skew risk premium in the equity index market through the skew swap. We argue that just as variance swaps can be used to explore the relationship between the implied variance in option prices and realized variance, so too can skew swaps be used to explore the relationship between...

This paper shows that low risk anomalies in the CAPM 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...

We develop Residual MisPricing (RMP), an index capturing mispricing relative to a linear benchmark asset pricing model, from the structure imposed by no-arbitrage. RMP is fully conditional and depends only on the returns of basic assets. Return data for several economies reveal that RMP is...