The SKEW index: extracting what has been left

Mattia Bevilacqua and Radu Tunaru

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: financial stability; implied skewness; market downturns; market sentiment; tail risk (search for similar items in EconPapers)
JEL-codes: C1 F3 G3 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2021-04-01
New Economics Papers: this item is included in nep-fdg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Financial Stability, 1, April, 2021, 53. ISSN: 1572-3089

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:108198

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