Skewness Premium and Index Option Returns

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This paper presents a simple way to estimate the skewness premium implied in index option returns. Using a methodology proposed by Constantinides/Jackwerth/Savov (2013), we create option-based investment strategies with the same volatility and the same market exposure (of one) but different degrees of skewness. The resulting return series can be seen as index returns with controlled skewness. If skewness is relevant for pricing, it will be reflected in differences in the mean returns of the strategies. In an empirical analysis for SPX, ESX and DAX index options in the sample period 1995-2015, we find a remarkably close association of skewness and average returns that is consistent with a significantly negative skewness premium.

Author(s):

Martin Wallmeier    
University of Fribourg
Switzerland