Predictable Dynamics in Higher Order Risk-Neutral Moments: Evidence from the S&P 500 Options
49 Pages Posted: 31 Dec 2010 Last revised: 12 Mar 2012
Date Written: March 10, 2012
We investigate whether there are predictable patterns in the dynamics of higher order risk-neutral moments extracted from the market prices of S&P 500 index options. To this end, we conduct a horse race among alternative forecasting models within an out-of-sample context over various forecasting horizons. We consider both a statistical and an economic setting. We find that higher risk-neutral moments can be statistically forecasted. However, only the one-day-ahead skewness forecasts can be economically exploited. This economic significance vanishes once we incorporate transaction costs. The results have implications for the dynamics of implied volatility surfaces.
Keywords: Implied volatility surface, Market efficiency, Model confidence set, Option strategies, Risk-neutral skewness, Risk-neutral kurtosis
JEL Classification: C53, C58, G10, G13, G17
Suggested Citation: Suggested Citation