What Information Does Risk Neutral Skewness Contain? Evidence From Price Rebounds and Momentum Crashes

58 Pages Posted: 27 Feb 2018 Last revised: 20 May 2019

See all articles by Paul Borochin

Paul Borochin

University of Connecticut - School of Business

Yanhui Zhao

University of Wisconsin - Whitewater - College of Business and Economics

Date Written: May 16, 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, What Information Does Risk Neutral Skewness Contain? Evidence From Price Rebounds and Momentum Crashes (May 16, 2019). Available at SSRN: https://ssrn.com/abstract=3125124 or http://dx.doi.org/10.2139/ssrn.3125124

Paul Borochin (Contact Author)

University of Connecticut - School of Business ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Yanhui Zhao

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

Whitewater, WI 53190
United States

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