Title: On risk-neutral skewness and commodity pricing
Authors: Ana-Maria Fuertes - Cass Business School - City University London (United Kingdom)
Weiqing Tang - University of Birmingham (United Kingdom) [presenting]
Zhenya Liu - Renmin University of China (China)
Abstract: The predictive content of risk-neutral skewness for the dynamics of commodity futures prices is investigated. A risk-neutral implied skewness measure obtained from weekly 10-year options and futures return data is shown to explain the variability of time series futures return, and to price the cross-section of commodity futures return. The higher (lower) the current model-free implied skewness, the higher (lower) the subsequent return. Under pricing (Over pricing) implied by positive (negative) skewness document mispricing correction procedure behind option implied skewness measure. Trading portfolio strategy sorted by risk-neutral skewness outperform its counterpart sorted by realized skewness with extra 14.5\% annual return. Results are robust to several alternatives.