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The SKEW index: extracting what has been left

Bevilacqua, Mattia and Tunaru, Radu (2021) The SKEW index: extracting what has been left. Journal of Financial Stability, 53. ISSN 1572-3089

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Identification Number: 10.1016/j.jfs.2020.100816

Abstract

This study disentangles a measure of implied skewness that is related to downward movements in the U.S. equity index from the corresponding implied skewness that is associated with upward movements. A positive SKEW index is constructed from S&P 500 call options, whereas a negative SKEW index is constructed from the S&P 500 put options. We show that the positive SKEW is linked to market sentiment, whereas the negative SKEW is related to existing tail risk measures. The negative SKEW is proposed as a more objective prudent tail risk measure, and it is found to be able to predict recessions, market downturns, and uncertainty indicators up to one year in advance. The predictive power of the negative SKEW is also confirmed when we control for other tail risk measures and also out-of-sample.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-f...
Additional Information: © 2020 Elsevier B.V.
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
H Social Sciences > HA Statistics
Date Deposited: 07 Jan 2021 12:03
Last Modified: 20 Oct 2021 01:05
URI: http://eprints.lse.ac.uk/id/eprint/108198

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