What Information Does Risk Neutral Skewness Contain? Evidence From Price Rebounds and Momentum Crashes
58 Pages Posted: 27 Feb 2018 Last revised: 9 Sep 2019
Date Written: September 8, 2019
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: Suggested Citation