Risk Neutral Skewness Predicts Price Rebounds and so can Improve Momentum Performance

59 Pages Posted: 27 Feb 2018 Last revised: 23 Jun 2020

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Yanhui Zhao

University of Wisconsin - Whitewater - College of Business and Economics

Date Written: September 8, 2019

Abstract

Positive option-implied risk-neutral skewness (RNS) predicts next-month abnormal underlying stock returns driven by upward rebounds of previously undervalued stocks. The RNS anomaly is strongest in periods of post-recession rebounds when momentum crashes occur. Furthermore, the momentum anomaly is strongest (weakest) in stocks with the most negative (positive) RNS. We generalize our findings to non-optionable stocks by constructing an RNS factor-mimicking portfolio, finding that a momentum strategy that avoids performance reversals has meaningfully superior performance. Our results hold after controlling for trading frictions, firm characteristics, and common risk factors.

Keywords: Risk Neutral Skewness, Momentum, Return Predictability

JEL Classification: G12, G13

Suggested Citation

Borochin, Paul and Zhao, Yanhui, Risk Neutral Skewness Predicts Price Rebounds and so can Improve Momentum Performance (September 8, 2019). Available at SSRN: https://ssrn.com/abstract=3125124 or http://dx.doi.org/10.2139/ssrn.3125124

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

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

Yanhui Zhao

University of Wisconsin - Whitewater - College of Business and Economics ( email )

Whitewater, WI 53190
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
420
Abstract Views
2,121
rank
82,603
PlumX Metrics