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We examine the impact of upper (lower) market volatility and skewness risks on stock returns. Our results show that market volatility and skewness risks have no significant effect on future stock returns. However, when separately considering call and put options, we find a significantly negative relation between innovations in upper market volatility (skewness) extracted from call options and subsequent stock returns. Moreover, the results remain significant after controlling for other known factors included in the factor models or a battery of firm-level characteristics. Our research shows that call and put options contain different information, and are differently priced in the stock market. This study can help explain the inconsistent results of the recent papers on asset pricing about market volatility and skewness.

Market volatility, market skewness, and the cross-section of expected returns in Chinese equity markets