Finance Department


Date of this Version



Accepted for publication in Journal of Financial and Quantitative Analysis;


This study tests whether investor belief differences affect the cross-sectional variation of risk-neutral skewness, using data on firm-level stock options traded on the CBOE from 2003 to 2006. Using well known proxies for heterogeneous beliefs, 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. This result also goes beyond the net price pressure hypothesis suggested by Bollen and Whaley (2004). Factor analysis identifies latent variables linked to systematic risk and belief differences. The belief factor explains more variation in the risk-neutral density than the risk-based factor. Our results suggest that belief differences may be one of the unexplained firm-specific components affecting skewness described in Dennis and Mayhew (2002).