The Dynamics of Risk-Neutral Implied Moments: Evidence from Individual Options

32 Pages Posted: 10 Sep 2009 Last revised: 2 Feb 2010

See all articles by Alexandra Hansis

Alexandra Hansis

Goethe University Frankfurt - House of Finance

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: February 1, 2010

Abstract

We study the estimation, the dynamics, and the predictability of option-implied risk-neutral moments (variance, skewness, and kurtosis) for individual stocks from various perspectives. We first show that it is in the estimation of the higher moments essential to use an interpolation with a narrow grid as well as a wide interval. We show that implied moments are well explained cross-sectionally by a number of firm characteristics. We use the characteristics that have been shown to exhibit correlation with expected returns (like size and the market-to-book ratio of equity). In a next step, we investigate the joint dynamics of the three moments in a vector autoregressive model. We find that the moments are significantly linked to each other over time. Finally, adding exogenous variables to the vector autoregression improves the explanatory power of our model even further. Granger causality tests show significant differences between the three implied moments.

Keywords: risk-neutral distribution, option-implied moments, model-free variance, skewness, kurtosis, vector autoregression

JEL Classification: G12, G13, C14, C33

Suggested Citation

Hansis, Alexandra and Schlag, Christian and Vilkov, Grigory, The Dynamics of Risk-Neutral Implied Moments: Evidence from Individual Options (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1470674 or http://dx.doi.org/10.2139/ssrn.1470674

Alexandra Hansis (Contact Author)

Goethe University Frankfurt - House of Finance ( email )

Campus Westend, Grueneburgplatz 1
Uni-Postfach H 13
Frankfurt, 60323
Germany

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Grigory Vilkov

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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