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Cross-sectional analysis of risk-neutral skewness

Taylor, S J and Yadav, P K and Zhang, Y (2009) Cross-sectional analysis of risk-neutral skewness. Journal of Derivatives, 16 (4). pp. 38-52. ISSN 1074-1240

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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.

Item Type: Article
Journal or Publication Title: Journal of Derivatives
Subjects: UNSPECIFIED
Departments: Lancaster University Management School > Accounting & Finance
Lancaster University Management School > Management Science
ID Code: 45400
Deposited By: ep_importer_pure
Deposited On: 11 Jul 2011 19:31
Refereed?: Yes
Published?: Published
Last Modified: 09 Apr 2014 22:31
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/45400

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