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

February 27, 2018

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.