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P. Borochin, Y. Zhao: “What Information Does Risk Neutral Skewness Contain? Evidence From Momentum Crashes”

P. Borochin, Y. Zhao: “What Information Does Risk Neutral Skewness Contain? Evidence From Momentum Crashes”

Stocks with high option-implied risk-neutral skewness (RNS) have positive abnormal returns driven by rebounds following poor performance. This performance reversal in past loser stocks also underlies momentum crashes. Consistent with this commonality, the RNS anomaly is strongest in periods of post-recession rebounds and high market volatility when momentum crashes occur. Furthermore, the momentum anomaly is strongest (weakest) in stocks with the lowest (highest) RNS, indicating a positive relationship between RNS and momentum crashes. We generalize our findings to all stocks by constructing an RNS factor-mimicking portfolio and find that a momentum strategy that avoids high skew factor loading stocks has superior performance to both the standard and risk-managed momentum strategies. Our results hold after controlling for trading frictions, firm characteristics, and risk factors.