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

71 Pages Posted: 22 Mar 2010 Last revised: 9 Jul 2013

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Scott Murray

Georgia State University

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

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

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: https://ssrn.com/abstract=1572827 or http://dx.doi.org/10.2139/ssrn.1572827

Turan 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://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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