Option-Implied variance asymmetry and the cross-section of stock returns

Tao Huang, Junye Li*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)21-36
Number of pages16
JournalJournal of Banking and Finance
Publication statusPublished - Apr 2019


  • Implied variance asymmetry
  • Informed trading
  • Liquidity
  • Return predictability
  • Risk-neutral semivariances
  • Risk-neutral skewness


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