Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options

Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This article explains the presence and evolution of risk-neutral skewness over time and in the cross section of individual stocks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options

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Publisher
Oxford University Press
Copyright
© 2003 The Society for Financial Studies
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/16.1.0101
Publisher site
See Article on Publisher Site

Abstract

This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This article explains the presence and evolution of risk-neutral skewness over time and in the cross section of individual stocks.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 16, 2003

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