The SKEW index: Extracting what has been left

Mattia Bevilacqua and Radu Tunaru

Journal of Financial Stability, 2021, vol. 53, issue C

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: Implied skewness; Tail risk; Market downturns; Market sentiment; Financial stability (search for similar items in EconPapers)
JEL-codes: C12 G13 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:53:y:2021:i:c:s1572308920301194

DOI: 10.1016/j.jfs.2020.100816

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