2004-04 FIN: Does Skewness matter? Evidence from Index Options Market (Working Paper Abstract)
Kalimipalli, M., & Sivakumar, R.
published: 2004 | Research publication | Working Paper - Finance
ABSTRACT: Current research on stock returns indicates that neglecting conditional skewness may bias inferences about risk. We examine if time-varying skewness in asset returns explains option mispricing. We model the temporal properties of the first three moments of asset returns, and devise trading rules that use skewness forecasts to trade in delta-neutral strips, straps and straddles using at-the-money S&P 500 index options. We find that changes in skewness are priced in the index option markets. Extant research has proposed jump-risk premia as an explanation for option mispricing. Our results suggest conditional skewness in the underlying asset returns as an alternative explanation for the mispricing.
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revised Dec 9/04
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