Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options

  title={Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options},
  author={Nikunj Kapadia and Gurdip Bakshi and Dilip B. Madan},
  journal={Journal of Financial Abstracts eJournal},
This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index, and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates… 

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