We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk-neutral returns distribution. We find that individual securities’ risk-neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross-section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co-moments, individual securities’ skewness matters.
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