The Skewness Risk in the Energy Market

In this paper, we study the skewness risk and its return predictability in the energy market. Skewness risk is often used to measure the possibility of market crash. We study both physical skewness (market skewness and cross-sectional average realized skewness) estimated from underlying stock returns and risk-neutral skewness evaluated from the options market. We find a significant positive relationship between one-month-ahead market return and average realized skewness in the energy market. This unique feature should be noted by investors and carefully considered by energy policymakers.