Abstract

http://ssrn.com/abstract=1572827
 
 

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Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns?


Turan G. Bali


Georgetown University - Robert Emmett McDonough School of Business

Scott Murray


University of Nebraska - Lincoln

July 9, 2013


Abstract:     
We investigate the pricing of risk-neutral skewness in the stock options market by creating skewness assets comprised of two option positions (one long and one short) and a position in the underlying stock. The assets are created such that exposure to changes in the underlying stock price (delta), and exposure to changes in implied volatility (vega) are removed, isolating the effect of skewness. We find a strong negative relation between risk-neutral skewness and the skewness asset returns, consistent with a positive skewness preference. The returns are not explained by well-known market, size, book-to-market, momentum, short-term reversal, volatility, or option market factors.

Number of Pages in PDF File: 71

Keywords: Cross-Section of Expected Returns, Risk-Neutral Skewness

JEL Classification: G10, G11, G12, G13, G14, G17

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Date posted: March 22, 2010 ; Last revised: July 9, 2013

Suggested Citation

Bali, Turan G. and Murray, Scott, Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns? (July 9, 2013). Available at SSRN: http://ssrn.com/abstract=1572827 or http://dx.doi.org/10.2139/ssrn.1572827

Contact Information

Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

Scott Murray (Contact Author)
University of Nebraska - Lincoln ( email )
Lincoln, NE 68588-0490
United States
402-472-2432 (Phone)
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