What Does Risk-Neutral Skewness Tell Us About Future Stock Returns?

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
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:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3033207