The information content of the term structure of risk-neutral skewness

Paul Borochin, Hao Chang and Yangru Wu ()

Journal of Empirical Finance, 2020, vol. 58, issue C, 247-274

Abstract: We seek to reconcile the debate about the price effect of risk-neutral skewness (RNS) on stocks. We document positive predictability from short-term skewness, consistent with informed-trading demand, and negative predictability from long-term skewness, consistent with skewness preference. A term spread on RNS captures different information from long- and short-term contracts, resulting in stronger predictability. The quintile portfolio with the lowest spread outperforms that with highest spread by 14.64% annually. The term structure of RNS predicts earnings surprises and price crashes. We extract the slope factor from RNS term structure, estimate its risk premium, and explore its relation with several macroeconomic variables.

Keywords: Risk-neutral skewness; Term structure; Return predictability; Hedging demand; Informed trading; Skewness preference (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:58:y:2020:i:c:p:247-274

DOI: 10.1016/j.jempfin.2020.06.003

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