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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

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Scott Murray

Georgia State University

Date Written: July 1, 2017

Abstract

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

Bali, Turan G. and Hu, Jianfeng and Murray, Scott, Option Implied Volatility, Skewness, and Kurtosis and the Cross-Section of Expected Stock Returns (July 1, 2017). Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2322945 or http://dx.doi.org/10.2139/ssrn.2322945

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

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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