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

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ID: 292304
2003
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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.
Reference Key
openalex_W3121239128 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Gurdip Bakshi, Nikunj Kapadia, Dilip B. Madan
Journal review of financial studies
Year 2003
DOI
10.1093/rfs/16.1.0101
URL
https://doi.org/10.1093/rfs/16.1.0101
Keywords Keywords not found

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