Option-implied skewness: Insights from ITM-options

Hannes Mohrschladt and Judith C. Schneider

Journal of Economic Dynamics and Control, 2021, vol. 131, issue C

Abstract: While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical and economic implications of using in-the-money (ITM) options. We find that the positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. While this reversal is inconsistent with an explanation based on skewness preferences, MFIS apparently reflects information that is not timely incorporated in stock prices due to market frictions. Based on these insights, we introduce ΔMFIS as a new measure of additional option-embedded information that significantly predicts subsequent returns beyond a large range of other option-based return predictors.

Keywords: In-the-money-options; Option-implied skewness; Return predictability; Market frictions (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001627

DOI: 10.1016/j.jedc.2021.104227

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