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

Przemysław S. Stilger (), Alexandros Kostakis and Ser-Huang Poon ()
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Przemysław S. Stilger: Accounting and Finance Group, University of Manchester, Manchester M15 6PB, United Kingdom
Ser-Huang Poon: Accounting and Finance Group, University of Manchester, Manchester M15 6PB, United Kingdom

Management Science, 2017, vol. 63, issue 6, 1814-1834

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.

Keywords: option-implied information; risk-neutral skewness; hedging pressure; overvaluation; short-selling constraints (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (36)

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