Abstract
We find a negative relationship between the individual stocks' semivariance premia, defined as the difference between the risk-neutral and physical expected downside semivariances, and future stock returns. The high-minus-low hedge portfolio earns the excess return of -64 (-46) basis points per month, the characteristic-adjusted return of -58 (-28) basis points per month, and the industry-adjusted return of -73 (-27) basis points per month in equal (value)-weighted returns. They are all economically substantial and statistically significant. Such a negative relationship can not be explained by risk-based asset pricing models. We find that the predictive power of semivariance premium is information-driven and reflects trading activity of informed investors who place large transactions on options.
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