Option-implied skewness: Insights from ITM-options

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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.

Original languageEnglish
Article number104227
JournalJournal of Economic Dynamics and Control
Publication statusPublished - 01.10.2021
Externally publishedYes

Bibliographical 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 Münster Research Seminar for their valuable comments. Further declarations of interest: none.

    Research areas

  • In-the-money-options, Market frictions, Option-implied skewness, Return predictability
  • Management studies