Journal of Financial and Quantitative Analysis

Research Articles

Heterogeneous Beliefs and Risk-Neutral Skewness

Geoffrey C. Friesena1, Yi Zhanga3 and Thomas S. Zorna2


a2, College of Business Administration, University of Nebraska, PO Box 880490, Lincoln, NE 68588

a3, College of Business, Prairie View A&M University, PO Box 519, MS 2310, Prairie View, TX 77446


This study tests whether belief differences affect the cross-sectional variation of risk-neutral skewness using data on firm-level stock options traded on the Chicago Board Options Exchange from 2003 to 2006. We find that stocks with greater belief differences have more negative skews, even after controlling for systematic risk and other firm-level variables known to affect skewness. Factor analysis identifies latent variables linked to risk and belief differences. The belief factor explains more variation in the risk-neutral skewness than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness.


  We thank Hendrik Bessembinder (the editor), Richard DeFusco, Donna Dudney, Kathy Farrell, Tisha Friesen, John Geppert, Stewart Mayhew (the referee), Manferd Peterson, Emre Unlu, and seminar participants at the University of Nebraska and the 2008 Financial Management Association Annual Meeting for helpful comments and suggestions.