Hitting SKEW for SIX

Liu, Zhangxin (Frank) and Robert Faff

Economic Modelling, 2017, vol. 64, issue C, 449-464

Abstract: In this study, we propose “SIX” as a new forward-looking index of negative market skew derived from state-preference pricing. Specifically, SIX is a forecast of the ratio of lower to upper partial moment volatility over a 30-day horizon, for SPX market returns. Using SPX options data from 1996 to 2013, we conduct a comparison between SIX and the CBOE SKEW index. First, we document that the daily change in VIX and SIX (SKEW) are negatively (positively) related. Second, we show that the daily change of SIX (SKEW) adds (does not add) significant explanatory power for predicting the one-day ahead return. Third, though biased, SIX produces an efficient forecast of future physical skewness. In contrast, there is no statistically significant relationship between SKEW and physical skewness. Collectively, our results suggest that as an indicator of institutional anxiety, both theoretically and in practice, SIX (SKEW) is a more than useful (questionable) complement to VIX.

Keywords: Skewness index; Risk-neutral moments; SKEW; VIX; State-preference pricing (search for similar items in EconPapers)
JEL-codes: D81 G10 G17 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:449-464

DOI: 10.1016/j.econmod.2017.02.026

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