Option-Implied Skewness and the Value of Financial Intermediaries

Abstract

For a sample of financial intermediaries from the US, we show that corporate value is strongly related to (risk-neutral) option-implied skewness. In contrast, historical (return-based) skewness does not play a role for valuation.
We illustrate that the option-implied skewess predicts observed (ex-post) stock returns better than the historical skewness. As under rational expectations observed (ex-post) returns should on average reflect ex-ante expected return, options are helpful to get insights about company valuation.
These results are confirmed also as we analyze separately ``Globally Systemic Important Financial Institutions'' (GSIFIs).
Our findings for the financial sector are in line with the previous literature that shows the importance of skewness pricing inside non-financial corporations. The data reveal that the correlation between corporate value and option-implied skewness is tighter for the segment of financial technology firms, which is an interesting finding for the most recent research on fin-tech valuation.

Keywords: financial intermediaries, corporate value, stock returns, option-implied skewness

JEL Classification: G21, G32