Essays on option-implied skewness, bank stock returns, and credit default swap

Abstract

This dissertation consists of three essays which analyze about the option-implied skewness, bank stock returns, and CDS. The first essay investigates Bakshi, Kapadia, and Madan (2003) methodology to measure option-implied ex ante skewness of the underlying stocks’ risk-neutral returns distribution. I find that the coefficients on skewness in Fama-MacBeth cross-sectional regressions of subsequent month return are negative and statistically significant. Specifically, the cross-sectional stock return predictability of skewness is only significant during periods of low market return and high investor sentiment. Investors consider high option-implied skewness stocks as lottery-like stocks.

The second essay reexamines the size anomaly in U.S. bank stock returns and suggest a new size factor that captures the size-dependent return difference. Gandhi and Lustig (2015) construct a size factor as a component of size-sorted bank stock portfolio returns, but this size factor has limited economic meaning. I compute a new size factor using the tail risk measure of Kelly and Jiang (2014). I show that tail risk captures the size-related exposure to bank stock returns. I further analyze the characteristics of the tail risk and its relation with bank stock returns. Investors perceive the too-big-to-fail hypothesis and the government’s asymmetric guarantee is reflected in the bank stock market.

The third essay complements the research on information flow between the equity and the CDS markets. Specifically, I investigate the findings of Hilscher, Pollet, and Wilson (2015) who argue that there is information spillover from the equity to the CDS market. While they do not consider how information environment is different in the equity market, I conclude that the firms having informative stock prices sensitively reveal information to the CDS market. Investors in the CDS market selectively accept the fundamental-related information from the equity market.