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Heterogeneous Beliefs and Risk-Neutral Skewness

Published online by Cambridge University Press:  19 April 2012

Geoffrey C. Friesen ,
Yi Zhang  and
Thomas S. Zorn
Geoffrey C. Friesen
Affiliation:
[email protected]
Yi Zhang
Affiliation:
[email protected], College of Business, Prairie View A&M University, PO Box 519, MS 2310, Prairie View, TX 77446
Thomas S. Zorn
Affiliation:
[email protected], College of Business Administration, University of Nebraska, PO Box 880490, Lincoln, NE 68588
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Abstract

This study tests whether belief differences affect the cross-sectional variation of risk-neutral skewness using data on firm-level stock options traded on the Chicago Board Options Exchange from 2003 to 2006. We find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. Factor analysis identifies latent variables linked to risk and belief differences. The belief factor explains more variation in the risk-neutral skewness than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 851 - 872
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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