Option-implied idiosyncratic skewness and expected returns: Mind the long run

Deshui Yu, Difang Huang and Mingtao Zhou

Journal of Empirical Finance, 2025, vol. 83, issue C

Abstract: This article examines the time-series predictive ability of the monthly option-implied idiosyncratic skewness (Skew) for the aggregate stock market. We find that Skew is a strong predictor of the U.S. equity premium using both in-sample and out-of-sample tests at forecast horizons up to 36 months over the period from January 1996 to December 2021. In comparison, Skew outperforms the previously used financial and macroeconomic variables. Furthermore, combining information in the transitional predictors with Skew can further improve the forecasting performance than using Skew alone. We provide two explanations for the documented predictability. First, Skew exhibits strong procyclical behavior and consistently declines ahead of economic downturns. Second, Skew acts as a forward-looking signal of investor sentiment and disagreement—positive shocks to Skew significantly increase both future investor sentiment and disagreement, with effects that persist over several horizons.

Keywords: Option-implied skewness; Predictive regression; Out-of-sample forecast; Combination forecast (search for similar items in EconPapers)
JEL-codes: C58 G12 G13 G19 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539825000647
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:83:y:2025:i:c:s0927539825000647

DOI: 10.1016/j.jempfin.2025.101642

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().