Is the Information on the Higher Moments of Underlying Returns Correctly Reflected in Option Prices?

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This study examines the information implied in options with short and long maturities. In the analysis using the forward moments, we find that long-term option investors, on average, seem to underestimate the third moment relative to short-term option investors, and this becomes severe when the market variance is large. We find that the third moment underestimation of long-term option investors is economically meaningful using Corrado and Su's model and a trading strategy exploiting the relative underestimated skewness in long-term options. The abnormal return of the strategy is around 7% per year after controlling systematic risks. (c) 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:722-744, 201
Publisher
WILEY-BLACKWELL
Issue Date
2016-08
Language
English
Article Type
Article
Keywords

RISK-NEUTRAL SKEWNESS; CROSS-SECTION; HETEROGENEOUS BELIEFS; IMPLIED VOLATILITY; EQUITY RETURNS; TERM STRUCTURE; STOCK RETURNS; MARKET; PREFERENCE; MISREACTION

Citation

JOURNAL OF FUTURES MARKETS, v.36, no.8, pp.722 - 744

ISSN
0270-7314
DOI
10.1002/fut.21769
URI
http://hdl.handle.net/10203/212460
Appears in Collection
MT-Journal Papers(저널논문)
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