Abstract
Using the risk-neutral volatility and skewness computed from options on the S&P500, we show there is an asymmetric contemporaneous relation between stock returns and changes in implied market volatility and skewness. Changes in expected market volatility and skewness are cross-sectionally priced only when implied market volatility or skewness increases. All stocks have similar returns when implied systematic volatility and/or skewness are decreasing. The economic impact of stocks' sensitivities to changes in expected market skewness is almost twice as much as sensitivities to changes in expected market volatility. These findings highlight the importance of not only implied systematic volatility to investors, but also the sensitivity to changes in implied systematic skewness.
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