Author : Przemyslaw Stan Stilger
Publisher :
ISBN 13 :
Total Pages : 74 pages
Book Rating : 4.:/5 (13 download)
Book Synopsis What Does Risk-Neutral Skewness Tell Us About Future Stock Returns? by : Przemyslaw Stan Stilger
Download or read book What Does Risk-Neutral Skewness Tell Us About Future Stock Returns? written by Przemyslaw Stan Stilger and published by . This book was released on 2016 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 is long the quintile portfolio with the highest RNS stocks and short the quintile portfolio with the lowest RNS stocks yields an average Fama-French-Carhart alpha of 55 bps per month (t-stat: 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.