The Dynamics of Risk-Neutral Implied Moments: Evidence from Individual Options
32 Pages Posted: 10 Sep 2009 Last revised: 2 Feb 2010
Date Written: February 1, 2010
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: Suggested Citation