Tail risk premiums versus pure alpha

Tail-risk skewness, rather than volatility, is correlated with risk premiums

chart showing underlying performance of the asset

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One of the pillars of modern finance theory is the concept of risk premium, ie, that more risky investments should, in the long run, also be more profitable. If this was not the case, investors would divest, prices would fall and expected returns would rise until they become attractive again. Cogent as it may sound, this conclusion appears to be in contradiction with direct empirical observations. For example, several authors have reported an inverted

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