Does Risk-Neutral Skewness Predict the Cross Section of Equity Option Portfolio Returns?

We investigate the pricing of risk-neutral skewness in the stock options market by creating skewness assets comprised of two option positions (one long and one short) and a position in the underlying stock. The assets are created such that exposure to changes in the underlying stock price (delta) and exposure to changes in implied volatility (vega) are removed, isolating the effect of skewness. We find a strong negative relation between risk-neutral skewness and the skewness asset returns, consistent with a positive skewness preference. The returns are not explained by well-known market, size, book-to-market, momentum, short-term reversal, volatility, or option market factors.