Option-implied skewness: Insights from ITM-options

Hannes Mohrschladt; Judith C. Schneider

doi:10.1016/j.jedc.2021.104227

Option-implied skewness: Insights from ITM-options

Hannes Mohrschladt^*
, Judith C. Schneider^*

^*Korrespondierende/r Autor/-in für diese Arbeit

Publikation: Beiträge in Zeitschriften › Zeitschriftenaufsätze › Forschung › Begutachtung

1 Zitat (Scopus)

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.

Originalsprache	Englisch
Aufsatznummer	104227
Zeitschrift	Journal of Economic Dynamics and Control
Jahrgang	131
ISSN	0165-1889
DOIs	https://doi.org/10.1016/j.jedc.2021.104227
Publikationsstatus	Erschienen - 01.10.2021
Extern publiziert	Ja

Bibliographische Notiz

This project was initiated when Judith C. Schneider was visiting researcher at INSEAD, Fontainebleau and was partly written while Hannes Mohrschladt was visiting researcher at the Ohio State University, Columbus. Financial support from the German Research Foundation (DFG) is gratefully acknowledged (DFG Grant SCHN 1454/2-1). The authors thank Maren Baars, Nicole Branger, Thomas Langer, Christian Schlag, two anonymous referees, participants at the 26th Annual Meeting of the German Finance Association, the 7th Paris Financial Management Conference, and the Finance Center Münster Research Seminar for their valuable comments. Further declarations of interest: none.

Fachgebiete und Schlagwörter

Betriebswirtschaftslehre

ASJC Scopus Sachgebiete

Angewandte Mathematik
Steuerung und Optimierung
Volkswirtschaftslehre und Ökonometrie

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10.1016/j.jedc.2021.104227

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title = "Option-implied skewness: Insights from ITM-options",

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, Market frictions, Option-implied skewness, Return predictability, Management studies",

author = "Hannes Mohrschladt and Schneider, \{Judith C.\}",

note = "This project was initiated when Judith C. Schneider was visiting researcher at INSEAD, Fontainebleau and was partly written while Hannes Mohrschladt was visiting researcher at the Ohio State University, Columbus. Financial support from the German Research Foundation (DFG) is gratefully acknowledged (DFG Grant SCHN 1454/2-1). The authors thank Maren Baars, Nicole Branger, Thomas Langer, Christian Schlag, two anonymous referees, participants at the 26th Annual Meeting of the German Finance Association, the 7th Paris Financial Management Conference, and the Finance Center M{\"u}nster Research Seminar for their valuable comments. Further declarations of interest: none. ",

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AU - Mohrschladt, Hannes

AU - Schneider, Judith C.

N1 - This project was initiated when Judith C. Schneider was visiting researcher at INSEAD, Fontainebleau and was partly written while Hannes Mohrschladt was visiting researcher at the Ohio State University, Columbus. Financial support from the German Research Foundation (DFG) is gratefully acknowledged (DFG Grant SCHN 1454/2-1). The authors thank Maren Baars, Nicole Branger, Thomas Langer, Christian Schlag, two anonymous referees, participants at the 26th Annual Meeting of the German Finance Association, the 7th Paris Financial Management Conference, and the Finance Center Münster Research Seminar for their valuable comments. Further declarations of interest: none.

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Y1 - 2021/10/1

N2 - 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.

AB - 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.

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KW - Return predictability

KW - Management studies

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DO - 10.1016/j.jedc.2021.104227

M3 - Journal articles

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SN - 0165-1889

VL - 131

JO - Journal of Economic Dynamics and Control

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ER -

Option-implied skewness: Insights from ITM-options

Abstract

Bibliographische Notiz

Fachgebiete und Schlagwörter

ASJC Scopus Sachgebiete

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