What Does Risk-Neutral Skewness Tell Us About Future Stock Returns?

Przemyslaw Stilger, Alexandros Kostakis, Ser-Huang Poon

Research output: Contribution to journalArticlepeer-review


This study documents a positive relationship between the option-implied risk-neutral skewness (RNS) of individual stock returns' distribution and future realized stock returns during the period 1996-2012. A strategy that is long the quintile portfolio with the highest RNS stocks and short the quintile portfolio with the lowest RNS stocks yields an average Fama-French-Carhart alpha of 55 bps per month (t-stat: 2.47). The significant underperformance of the portfolio with the most negative RNS stocks is driven by those stocks that are also perceived as relatively overpriced according to a series of overvaluation proxies and are too costly or too risky to sell short, thereby hindering the price correction mechanism. Our findings indicate that a highly negative RNS value, when reflecting high hedging demand for options by investors who perceive the underlying stock as relatively overpriced but hard to sell short, is a robust signal of significant future stock underperformance.
Original languageEnglish
Pages (from-to)1657-2048
Issue number6
Early online date21 Apr 2016
Publication statusPublished - 21 Apr 2016


  • Option-Implied Information, Risk-Neutral Skewness, Hedging Pressure, Overvaluation, Short Selling Constraints.


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