Option Implied Volatility, Skewness, and Kurtosis and the Cross-Section of Expected Stock Returns
82 Pages Posted: 9 Sep 2013 Last revised: 14 Aug 2017
Date Written: July 1, 2017
We demonstrate that an ex-ante measure of expected returns based on analyst price targets is highly related to the market's required rate of return. We then show that ex-ante measures of volatility, skewness, and kurtosis derived from option prices are positively related to ex-ante expected returns. While expected returns are related to both systematic and unsystematic variance risk, only the unsystematic components of skewness and kurtosis are important for explaining the cross-section of expected stock returns. The results are consistent using different measures of ex-ante risk and robust to controls for other variables related to stock returns and analyst bias.
Keywords: Risk-Neutral Moments, Option-Implied Risk, Ex-Ante Expected Stock Returns, Price Targets
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation