Option‐implied moments and the cross‐section of stock returns

Lykourgos Alexiou and Leonidas Rompolis

Journal of Futures Markets, 2022, vol. 42, issue 4, 668-691

Abstract: We construct a joint score measure using option‐implied volatility, skewness, and kurtosis gauging investors' expectations about favorable future return distribution properties. The high–low decile portfolio formed on this measure earns a statistically significant 0.75% value‐weighted average monthly return. Risk‐adjusted returns are significant and robust when controlling for various characteristics. The positive abnormal return of the spread portfolio can be explained by its exposure to aggregate volatility risk when investors' sentiment is low. When sentiment is high, it is also driven by information flow from the options to the stock market for stocks perceived to be as relatively mispriced.

Date: 2022
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https://doi.org/10.1002/fut.22304

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