Asymmetric Variance Premium, Skewness Premium, and the Cross-Section of Stock Returns

Time: 27th March 2019

Location: A302, Academic Building, Newhuadu Business School

Guest: Dr. Tao Huang (International Business School, Xi’an Jiaotong-Liverpool University)

Researching area: Empirical Asset Pricing, International Financial Market, Market’s Microstructure, Mutual Funds, Financial Big Data, Learning Machine, Quantitative transactional strategy

Abstract: We find a positive relationship between the individual stocks" asymmetric variancepremia, defined as the difference between the risk-neutral and physical expected variance asymmetries, and the future stock returns. The high-minus-low hedge portfolio earns the excess return of 72 basis points per month, the characteristic-adjusted return of 66 basis points per month, and the industry-adjusted return of 79 basis points per month. They are all economically substantial and statistically highly significant. We show that asymmetric variance premium is closely related to skewness premium. Such a positive relationship can not be explained by risk-based asset pricing models. We find that the predictive power of asymmetric variance premium is information-driven and reflects trading activity of informed traders who place more transactions on options.