Implied Systematic Moments and the Cross-Section of Stock Returns

34 Pages Posted: 10 Nov 2010

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

James Doran

University of New South Wales

David R. Peterson

Florida State University - Department of Finance

Date Written: November 4, 2010

Abstract

Using the risk-neutral volatility and skewness computed from options on the S&P500, we show there is an asymmetric contemporaneous relation between stock returns and changes in implied market volatility and skewness. Changes in expected market volatility and skewness are cross-sectionally priced only when implied market volatility or skewness increases. All stocks have similar returns when implied systematic volatility and/or skewness are decreasing. The economic impact of stocks' sensitivities to changes in expected market skewness is almost twice as much as sensitivities to changes in expected market volatility. These findings highlight the importance of not only implied systematic volatility to investors, but also the sensitivity to changes in implied systematic skewness.

Keywords: Asset Pricing, Implied Market Skewness, Implied Market Volatility, Risk Neutral Market Moments, Portfolio Selection

JEL Classification: G11, G12, G14

Suggested Citation

DeLisle, Jared and Doran, James and Peterson, David R., Implied Systematic Moments and the Cross-Section of Stock Returns (November 4, 2010). Available at SSRN: https://ssrn.com/abstract=1706249 or http://dx.doi.org/10.2139/ssrn.1706249

Jared DeLisle (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

James Doran

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

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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