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- Title
Heterogeneous Beliefs and Risk-Neutral Skewness.
- Authors
Friesen, Geoffrey C.; Zhang, Yi; Zorn, Thomas S.
- Abstract
This study tests whether belief differences affect the cross-sectional variation of risk-neutral skewness using data on firm-level stock options traded on the Chicago Board Options Exchange from 2003 to 2006. We find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. Factor analysis identifies latent variables linked to risk and belief differences. The belief factor explains more variation in the risk-neutral skewness than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness.
- Subjects
STOCK options; HETEROGENEITY; SKEWNESS (Probability theory); FINANCIAL risk; CROSS-sectional method; MATHEMATICAL models of option; MATHEMATICAL models
- Publication
Journal of Financial & Quantitative Analysis, 2012, Vol 47, Issue 4, p851
- ISSN
0022-1090
- Publication type
Article
- DOI
10.1017/S0022109012000269