While recent theoretical and empirical work suggests that the physical skewness of a stock’s future discrete return distribution prices stocks, it does not tell us over which return horizon(s) that physical skewness is priced. Developing a novel block bootstrap estimator that allows us to calculate realized return skewness over arbitrary horizons, we aim to identify those return horizons. In doing so, we first show that our block bootstrap estimator produces more accurate realized skewness estimates than other recent estimators do. Next, we report that the existing skewness proxies used in the empirical asset pricing literature differ in how well they predict skewness over short or long return horizons. Finally, we reveal that the skewness pricing evidence documented in the empirical asset pricing literature is mostly driven by skewness over short (and not long) return horizons.

We study the effect of an asset’s volatility on the expected returns of European options on the asset. Deriving predictions from a stochastic discount factor model, we show that the effect depends on whether variations in the asset’s volatility are driven by systematic or idiosyncratic volatility. While idiosyncratic-volatility-induced variations only affect the option elasticity, systematic-volatility-induced variations also oppositely affect the expected return of the asset. Since the expected asset return (elasticity) effect dominates for options with more linear (non-linear) payoffs, systematic volatility prices sufficiently in-the-money (out-of-the-money) options with the opposite (same) sign as idiosyncratic volatility. Using single-stock calls as test assets, double-sorted portfolios and Fama–MacBeth (1973) regressions broadly support the model’s predictions.