Asymmetry and the Cross-section of Option Returns

Jianqiu Wang, Ke Wu, Sijie Yang and Dexin Zhou

Journal of Financial Markets, 2024, vol. 71, issue C

Abstract: We propose a novel measure of upside asymmetry based on probability density function that utilizes information from the distribution of option returns. Our analysis of U.S. option data reveals a positive cross-sectional relationship between the upside asymmetry (RML) and subsequent option returns. This relationship cannot be explained by stock or option characteristics studied in previous literature and do not reverse in the following months. Additionally, the relationship is stronger among firms with higher costs of arbitrage. RML robustly predicts future realized and implied volatilities after controlling for historical volatility and lagged implied volatility.

Keywords: Asymmetry; Return predictability; Cross-sectional option returns; Volatility (search for similar items in EconPapers)
JEL-codes: C21 G13 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:71:y:2024:i:c:s1386418124000508

DOI: 10.1016/j.finmar.2024.100932

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