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...

The value of an equity investment can be framed as an embedded call option on a firm's assets. The embedded call option creates a non-linear relationship between stock returns and underlying risk factors; however, such option value and the impact of this non-linearity are often underestimated or...