Asset pricing with skewed-normal return

Despite the fact that it is easy to see intuitively why skewness and coskewness should matter for asset pricing, it is difficult to build a model that links analytically skewness premia to deep structural parameters governing preferences and the distribution of shocks. This paper takes up the challenge and studies the effect of skewness and coskewness on asset valuation. To reach this important goal, asset returns skewness is modeled with promising Azzalini's [1985. Scandinavian Journal of Statistics 12, 171-178] skew-normal distribution. With this assumption, we are now able to derive explicit expressions of assets skewness premiums and to shed a new light on asset valuation.

► Skewness effects on asset return is studied with Azzalini skew-normal distribution. ► Explicit expressions of premiums show a key role for the coefficient of risk aversion. ► Negative skewness has effects on the risk free rate and the market premium. ► Skewness premiums vanish when the coefficient of risk aversion is one. ► The paper highlights the contribution of idiosyncratic coskewness in asset pricing.