Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns? Online Appendix

We examine the ability of physical (historical) skewness to predict the future returns of both stocks and skewness assets. Each month, on the first trading day following the monthly expiration, historical skewness is calculated as the skewness of the daily log returns over the past year. On the second day after the monthly expiration, portfolios of stocks and skewness assets are formed based on deciles of historical skewness. The skewness assets are formed using 1-month options. The portfolios are held until the options in the skewness assets expire approximately one month later. Table I presents the average raw returns, along with the CAPM (CAPM), Fama-French 3-factor (FF3 Alpha) and Fama-French-Carhart 4-factor (FFC4 Alpha) alphas following Fama and French (1993) and Carhart (1997). The 10-1 column represents the raw and risk-adjusted returns for the portfolio that is long skewness assets for decile 10 of RNSkew and short skewness assets for decile 1. The 10-1 t-stat column is the t-statistic testing the null hypothesis that the average 10-1 return, CAPM alpha, FF3 alpha, and FFC4 alpha is equal to 0. The t-statistics are adjusted following Newey and West (1987) with lag of 6 months. None of the 10-1 alphas exhibit a statistically significant difference from 0. Thus, we find no evidence in our sample that physical skewness can predict the future returns of stocks or skewness assets