Risk-neutral higher moments: Characteristics, risks and applications

We use out-of-the-money (OTM) put/call option prices data of Hangseng Index to estimate market index risk-neutral higher moments. Modeling with another expectation of higher moments that forecasted by AR(1)-GARCH(1, 1) model of historical distribution, we run a higher moments risk premium test. We find an evidence that higher moments, such as skewness and kurtosis, have strongly significant negative risk premium, which suggests the investors in HK are willing to pay for the extreme return in the short run. We also study the structure of option prices in Hong Kong stock market, showing that the implied volatility curve derived from Hangseng Index options is flat. During analysis of market index higher moments, we found that the normality null hypothesis cannot be rejected.