TY - JOUR
T1 - Option-Implied variance asymmetry and the cross-section of stock returns
AU - Huang, Tao
AU - Li, Junye
N1 - Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2019/4
Y1 - 2019/4
N2 - 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.
AB - 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.
KW - Implied variance asymmetry
KW - Informed trading
KW - Liquidity
KW - Return predictability
KW - Risk-neutral semivariances
KW - Risk-neutral skewness
UR - http://www.scopus.com/inward/record.url?scp=85061086526&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2019.02.001
DO - 10.1016/j.jbankfin.2019.02.001
M3 - Article
AN - SCOPUS:85061086526
SN - 0378-4266
VL - 101
SP - 21
EP - 36
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -