Predictable Dynamics in Higher-Order Risk-Neutral Moments: Evidence from the S&P 500 Options

Michael Neumann () and George Skiadopoulos

Journal of Financial and Quantitative Analysis, 2013, vol. 48, issue 3, 947-977

Abstract: We investigate whether there are predictable patterns in the dynamics of higher-order risk-neutral moments (RNMs) extracted from the market prices of Standard & Poor’s (S&P) 500 index options. To this end, we conduct a horse race among alternative forecasting models within an out-of-sample context over various forecasting horizons. We consider both a statistical and an economic setting. We find that higher RNMs can be statistically forecasted. However, only the 1-day-ahead skewness forecasts can be economically exploited. This economic significance vanishes once we incorporate transaction costs. The results have implications for the dynamics of implied volatility surfaces.

Date: 2013
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