We show that the prices of risk for factors that are nonlinear in the market return are readily obtained using index option prices. The price of co-skewness risk corresponds to the market variance risk premium, and the price of co-kurtosis risk corresponds to the market skewness risk premium....

A substantial portion of the variation in the market variance risk premium can be explained by the conditional covariance between the market return and its variance, which we refer to as the leverage effect. This finding holds at different data frequencies and for various sample periods, and it...