Option Implied Volatility, Skewness, and Kurtosis and the Cross-Section of Expected Stock Returns

67 Pages Posted: 9 Sep 2013 Last revised: 23 Jan 2019

See all articles by Turan G. Bali

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: January 1, 2019

Abstract

We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns are related to both the systematic and unsystematic components of volatility, only the unsystematic components of skewness and kurtosis are related to the cross section of expected stock returns after controlling for other variables known to be related to the cross section of expected stock returns or analyst forecast 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 (January 1, 2019). 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 G. 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: https://sites.google.com/a/georgetown.edu/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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