Information Uncertainty and the Puzzle of Option-Implied Skewness

We show empirically that option-implied quantile skewness is priced differently depending on which portion of the risk-neutral distribution it is estimated from: Quantile skewness estimated from the tail (center) of the risk-neutral distribution is positively (negatively) related to future stock returns. Our results are consistent with investors who rely on information from traded options and disregard information from the extrapolated volatility surface. Furthermore, we find that quantile skewness is highly correlated with central skewness but more robust. Estimates of quantile skewness are accurate even if option prices span a small domain, have large gaps between strikes, and are noisy.