Abstract

http://ssrn.com/abstract=1993321
 
 

References (39)



 
 

Citations (8)



 


 



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

April 20, 2012


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 price of the underlying stock (delta), and exposure to changes in implied volatility (vega) are removed, isolating the effect of skewness. We find a strong negative relation between implied risk-neutral skewness and the returns of the skewness assets, consistent with a positive skewness preference. The returns are not explained by well-known market, size, book-to-market, momentum, and short-term reversal factors. Additional volatility, stock, and option market factors also fail to explain the portfolio returns. Neither commonly used metrics of portfolio risk (standard deviation, value- at-risk, and expected shortfall), nor analyses of factor sensitivities provide evidence supporting a risk-based explanation of the portfolio returns.

Number of Pages in PDF File: 72

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

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

working papers series


Download This Paper

Date posted: January 30, 2012 ; Last revised: April 25, 2012

Suggested Citation

Bali, Turan G. and Murray, Scott, Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns? (April 20, 2012). Available at SSRN: http://ssrn.com/abstract=1993321 or http://dx.doi.org/10.2139/ssrn.1993321

Contact Information

Turan G. Bali (Contact Author)
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
University of Nebraska - Lincoln ( email )
Lincoln, NE 68588-0490
United States
402-472-2432 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 1,227
Downloads: 260
Download Rank: 13,588
References:  39
Citations:  8

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.593 seconds