Abstract

http://ssrn.com/abstract=1734520
 
 

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The Pricing of Risk-Neutral Systematic Moments in the Cross-Section of Expected Returns


Jared DeLisle


Utah State University

James S. Doran


Florida State University - Department of Finance

David R. Peterson


Florida State University - Department of Finance

March 28, 2011


Abstract:     
This study investigates if changes in risk-neutral systematic volatility, skewness, and kurtosis, are priced, either symmetrically or asymmetrically, as systematic risk factors in the cross-section of stock returns. The moments are constructed using options on the S&P 500, and represent investors' expectation of the distribution of future market returns. Portfolio analyses reveal positive changes in implied market skewness are priced between -5% to -11% annually, while negative changes in implied market skewness are not priced. Additionally, when accounting for an asymmetric relation between returns and implied market skewness, changes in implied market volatility and kurtosis are not priced. The results are robust to portfolio weighting, market capitalization, book-to-market equity ratio, idiosyncratic volatility, and idiosyncratic skewness. Time-series and cross-sectional analyses confirm the portfolio results and associate positive changes in implied market skewness with a negative price of risk. An implied market skewness tracking portfolio possesses a great deal of power to price a variety of portfolio returns, and subsumes other typical hedge portfolios used in asset pricing. The results present a challenge to the theoretical asset pricing models, since the asymmetric results cannot be accounted for in an ICAPM framework, and the pricing of only positive skewness changes is inconsistent with the predictions of prospect theory.

Number of Pages in PDF File: 57

Keywords: asset pricing, risk-neutral moments, systematic volatility, systematic skewness, systematic kurtosis, expected returns

JEL Classification: G10, G11, G12

working papers series





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Date posted: January 4, 2011 ; Last revised: April 2, 2011

Suggested Citation

DeLisle, Jared and Doran, James S. and Peterson, David R., The Pricing of Risk-Neutral Systematic Moments in the Cross-Section of Expected Returns (March 28, 2011). Available at SSRN: http://ssrn.com/abstract=1734520 or http://dx.doi.org/10.2139/ssrn.1734520

Contact Information

Jared DeLisle (Contact Author)
Utah State University ( email )
Logan, UT 84322
United States
435-797-0885 (Phone)
James S. Doran
Florida State University - Department of Finance ( email )
Tallahassee, FL 32306-1042
United States
850-644-7868 (Phone)
HOME PAGE: http://garnet.acns.fsu.edu/~jsdoran/
David R. Peterson
Florida State University - Department of Finance ( email )
Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)
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