Peter Christoffersen, Mathieu Fournier, Kris Jacobs, and Mehdi Karoui
We show that the prices of risk for factors that are nonlinear in the market return can be 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. Option-based estimates of the prices of risk lead to reasonable values of the associated risk premia. An analysis of factor models with co-skewness risk indicates that the new estimates of the price of risk improve the models’ performance compared to regression-based estimates.