Stilger, Przemyslaw S, Kostakis, Alexandros ORCID: 0000-0002-2358-6484 and Poon, Ser-Huang
(2017)
What Does Risk-Neutral Skewness Tell Us About Future Stock Returns?
Management Science, 63 (6).
pp. 1657-2048.
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Abstract
This study documents a positive relationship between the option-implied risk-neutral skewness (RNS) of individual stock returns’ distribution and future realized stock returns during the period 1996–2012. A strategy that goes long the quintile portfolio with the highest RNS stocks and short the quintile portfolio with the lowest RNS stocks yields a Fama–French–Carhart alpha of 55 basis points per month (t-statistic of 2.47). The significant underperformance of the portfolio with the most negative RNS stocks is driven by those stocks that are also perceived as relatively overpriced according to a series of overvaluation proxies and are too costly or too risky to sell short, thereby hindering the price correction mechanism. Our findings indicate that a highly negative RNS value, when reflecting high hedging demand for options by investors who perceive the underlying stock as relatively overpriced but hard to sell short, is a robust signal of significant future stock underperformance.
Item Type: | Article |
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Uncontrolled Keywords: | option-implied information, risk-neutral skewness, hedging pressure, overvaluation, short-selling constraints |
Depositing User: | Symplectic Admin |
Date Deposited: | 21 Feb 2019 11:38 |
Last Modified: | 19 Jan 2023 01:02 |
DOI: | 10.1287/mnsc.2015.2379 |
Related URLs: | |
URI: | https://livrepository.liverpool.ac.uk/id/eprint/3033207 |
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What Does Risk-Neutral Skewness Tell Us About Future Stock Returns? (deposited 22 Oct 2018 09:54)
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