JOB MARKET CANDIDATE
Field: Quantitative Finance
Research Interests: Asset Pricing; Option Trading Strategy; Portfolio Allocation
(Expected) Graduation: May 2018
Massimo Guidolin: firstname.lastname@example.org
Francesco Saita: email@example.com
Gabor Koncz: firstname.lastname@example.org
Department of Finance
Via Roentgen 1, Milan, 20136, Italy
I will be available for interviews at the SAEe meeting in Barcelona (14 -16 December 2017), at the RES meeting in London (19-20 December 2017) and at ASSA meeting in Philadelphia, PA (January 5-7, 2018).
Job Market Paper
Option-Based Measures of Co-Skewness and Co-Kurtosis Risk
I derive a new formula that expresses the measures of covariance, co-skewness, and co-kurtosis risk in terms of market risk-neutral moments and co-moments between stock and index returns. I then use the forward-looking information contained in the option prices to estimate option-implied moments and higher-moment correlations in order to construct market risk betas, co-skewness betas, and co-kurtosis betas. The empirical analysis suggests the following findings: compared to regression-based standard competitors, such as CAPM, the method that I have devised performs better in terms of mean squared error and R-squared. An out-of-sample analysis of factor models incorporating co-skewness and co-kurtosis risk premium indicates that the new risk measures improve the return prediction. My results suggest that using option market information improves asset pricing in terms of model fit as well as out-of-sample forecasting power.
The Cross-Section of Equity Option Returns
Empirical research has argued that option returns are anomalous based on standard return metrics, such as average returns or Sharpe ratios. Other studies treat this return anomaly as evidence that skewness preference is priced. Recent theoretical developments predict a negative relationship between total skewness and average returns. Based on the newly developed Beta-Heston model, I study the cross-section of equity option returns to investigate the out-of-the-money option mispricing issue. I find that by comparing historical statistics to those generated by the model, the puzzling out-of-the-money put returns are consistent with the Beta-Heston model estimation. I also find that the well documented skewness preference is not priced in equity options. Additionally, I provide evidence that casts doubt on the hypothesis of market imperfections and constrained financial intermediaries.