The Information Content of the Term Structure of Risk-Neutral Skewness

54 Pages Posted: 20 May 2017 Last revised: 21 Sep 2018

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Hao Chang

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: September 10, 2018

Abstract

We seek to reconcile the debate about the price effect of risk-neutral skewness (RNS) on stocks. We document positive predictability from short-term skewness, consistent with informed-trading demand, and negative predictability from long-term skewness, consistent with skewness preference. A term spread on RNS captures different information from long- and short-term contracts, resulting in stronger predictability. The quintile portfolio with the lowest spread outperforms that with highest spread by 14.64% annually. The term structure of RNS predicts earnings surprises and price crashes. The information difference between short- and long-term options explains the pricing difference of their RNS, providing a potential resolution to the debate.

Keywords: Risk-Neutral Skewness, Term Structure, Return Predictability, Hedging Demand, Informed Trading, Skewness Preference

JEL Classification: G12, G13, G14

Suggested Citation

Borochin, Paul and Chang, Hao and Wu, Yangru, The Information Content of the Term Structure of Risk-Neutral Skewness (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=2971057 or http://dx.doi.org/10.2139/ssrn.2971057

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Hao Chang

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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