Idiosyncratic Skewness Preference or Measurement Error? Evidence from the Options Market

30 Pages Posted: 12 May 2018

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Date Written: March 15, 2018

Abstract

If the implied volatility is higher than the realized volatility, OTM call returns can be negative and decrease in strike prices/skewness, a return pattern also consistent with skewness preference. Empirically, we find the above return pattern is not driven by investors purchasing OTM calls, but only exists in short-term stock calls of small prices. We show large price survivorship bias elevates the call prices and causes the finding of the above return pattern. After calls whose prices are too small to quote are included, OTM call returns become positive and no longer decrease in strike skewness. Finally, we show measurement error also contributes to the finding of stock returns decreasing in ex-ante skewness computed from the options prices. Our study suggests the evidence for idiosyncratic skewness seeking from the option prices are not valid.

Keywords: Options, Skewness Seeking, Measure Error

JEL Classification: G10

Suggested Citation

Chan, Kalok and Ni, Sophie Xiaoyan, Idiosyncratic Skewness Preference or Measurement Error? Evidence from the Options Market (March 15, 2018). Available at SSRN: https://ssrn.com/abstract=3166379 or http://dx.doi.org/10.2139/ssrn.3166379

Kalok Chan

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Sophie Xiaoyan Ni (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

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