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Asymmetry and the Cross-section of Option Returns

Author

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  • Wang, Jianqiu
  • Wu, Ke
  • Yang, Sijie
  • Zhou, Dexin

Abstract

We propose a novel measure of upside asymmetry based on probability density function that utilizes information from the distribution of option returns. Our analysis of U.S. option data reveals a positive cross-sectional relationship between the upside asymmetry (RML) and subsequent option returns. This relationship cannot be explained by stock or option characteristics studied in previous literature and do not reverse in the following months. Additionally, the relationship is stronger among firms with higher costs of arbitrage. RML robustly predicts future realized and implied volatilities after controlling for historical volatility and lagged implied volatility.

Suggested Citation

  • Wang, Jianqiu & Wu, Ke & Yang, Sijie & Zhou, Dexin, 2024. "Asymmetry and the Cross-section of Option Returns," Journal of Financial Markets, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finmar:v:71:y:2024:i:c:s1386418124000508
    DOI: 10.1016/j.finmar.2024.100932
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    More about this item

    Keywords

    Asymmetry; Return predictability; Cross-sectional option returns; Volatility;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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