Skewness Term Structure Tests

Thorsten Lehnert and Yuehao Lin
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Yuehao Lin: LSF

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: In this paper, we conduct skewness term structure tests to check whether the temporal structure of risk-neutral skewness is consistent with rational expectations. Because risk-neutral skewness is substantially mean reverting, skewness shocks should decay quickly and risk-neutral skewness of more distant option should display the rationally expected smoothing behavior. Using an equilibrium asset and option-pricing model in a production economy under jump diffusion with stochastic jump intensity, we derive this elasticity analytically. In an empirical application of the model using more than 20 years of data on S&P500 index options, we find that this elasticity turns out to be different than suggested under rational expectations - smaller on the short end (undereaction) and larger on the long end (overreaction) of the ‘skewness curve’.

Keywords: Asset Pricing; Skewness Term Structure; Option Markets; Central; Moments; Risk Compensation; Risk Aversion (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
Date: 2014
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http://wwwen.uni.lu/content/download/71182/900112/ ... hnert_May%202014.pdf (application/pdf)

Related works:
Journal Article: Skewness Term-Structure Tests (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:14-08

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