We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Risk-Neutral Skewness: Evidence from Stock Options.
- Authors
Dennis, Patrick; Mayhew, Stewart
- Abstract
We investigate the relative importance of various factors in explaining the volatility skew observed in the prices of stock options traded on the Chicago Board Options Exchange. The skewness of the risk-neutral density implied by individual stock option prices tends to be more negative for stocks that have larger betas, suggesting that market risk is important in pricing individual stock options. Also, implied skewness tends to be more negative in periods of high market volatility, and when the risk-neutral density for index options is more negatively skewed. Other firm-specific factors, including firm size and trading volume also help explain cross-sectional variation in skewness. However, we find no robust relationship between skewness and the firm's leverage. Nor do we find evidence that skewness is related to the put/call ratio, which may be viewed as a proxy for trading pressure or market sentiment. Overall, firm-specific factors seem to be more important than systematic factors in explaining the variation in the skew for individual firms.
- Subjects
MATHEMATICAL models of option; MARKET volatility; STOCK prices; MATHEMATICAL models; FINANCIAL leverage; STOCK options; SECURITIES trading volume
- Publication
Journal of Financial & Quantitative Analysis, 2002, Vol 37, Issue 3, p471
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/3594989