Cross-sectional analysis of risk-neutral skewness

Stephen J. TAYLOR, Pradeep K. YADAV, Yuanyuan ZHANG

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

14 Citations (Scopus)

Abstract

The authors investigate the association of various firm-specific and marketwide factors with the risk-neutral skewness (RNS) implied by the prices of individual stock options. The analysis covers 149 U.S. firms over a four-year period. The authors find that, consistent with earlier studies, the RNS of individual firms varies significantly and negatively with firm size, firm systematic risk, and market volatility and varies significantly and positively with the RNS of the market index. The authors also find that most of the variation in individual RNS is explained by firm-specific rather than marketwide factors. The authors also document several interesting new results that are clearly unambiguous and significantly stronger than in earlier work, or opposite to earlier evidence, or for variables that have been examined for the first time. The results show that 1) market sentiment has a negative and significant effect on RNS; 2) the higher a firm’s own volatility, the more negative the RNS, a relationship that is in the same direction as for overall market volatility; 3) greater market liquidity is associated with more negative RNS, but the liquidity that is relevant for RNS is that of the options market, rather than that in the underlying stock. Surprisingly, volatility asymmetry is not relevant for RNS. Finally, the leverage ratio is not negatively but positively and strongly related with RNS.
Original languageEnglish
Pages (from-to)38-52
Number of pages15
JournalThe Journal of Derivatives
Volume16
Issue number4
DOIs
Publication statusPublished - 1 Jan 2009

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Cross-sectional analysis
Skewness
Factors
Market volatility
Stock options
Liquidity
Market liquidity
Individual risk
Market sentiment
Systematic risk
Options markets
Leverage ratio
Market index
Volatility asymmetry
Firm size

Cite this

TAYLOR, Stephen J. ; YADAV, Pradeep K. ; ZHANG, Yuanyuan. / Cross-sectional analysis of risk-neutral skewness. In: The Journal of Derivatives. 2009 ; Vol. 16, No. 4. pp. 38-52.
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Cross-sectional analysis of risk-neutral skewness. / TAYLOR, Stephen J.; YADAV, Pradeep K.; ZHANG, Yuanyuan.

In: The Journal of Derivatives, Vol. 16, No. 4, 01.01.2009, p. 38-52.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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