Trading activity, risk aversion, and risk neutral skewness: Evidence from SSE 50ETF option

This paper utilizes a unique database to investigate how trading activity affects risk -neutral skewness (RNS), and how risk attitude affects the return predictability of RNS in China SSE 50ETF option market. We find that the individual investors' option trading activities play a dominant role on RNS. Furthermore, results show that individual investors prefer to trade deep OTM (out -of -the -money) options in earlier periods and switch to ATM (at -the -money) options in later periods. These findings suggest that option investors are relatively less risk averse in earlier periods. We then find that RNS negatively predicts future returns of the underlying 50ETF only when investors are risk loving in earlier periods. In contrast, the relation between RNS and subsequent underlying returns in later periods becomes positive when investors become less speculative.