Option-Implied Variance Asymmetry and the Cross-Section of Stock Returns
Author | : Tao Huang |
Publisher | : |
Total Pages | : 48 |
Release | : 2018 |
ISBN-10 | : OCLC:1304453228 |
ISBN-13 | : |
Rating | : 4/5 (28 Downloads) |
Download or read book Option-Implied Variance Asymmetry and the Cross-Section of Stock Returns written by Tao Huang and published by . This book was released on 2018 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We find a positive relationship between individual stocks' implied variance asymmetry, defined as the difference between upside and downside risk-neutral semivariances extracted from out-of-money options, and future stock returns. The high-minus-low hedge portfolio earns the excess return of 0.90% (0.67%) per month in equal-weighted (value-weighted) returns. We show that implied variance asymmetry provides a neat measure of risk-neutral skewness and outperforms the standard risk-neutral skewness in predicting the cross-section of future stock returns. Risk-based equilibrium asset pricing models can not explain such a positive relationship, which instead can be potentially explained by information asymmetry and informed trading.