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The skewness index: uncovering the relationship with volatility and market returns

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  • Elyas Elyasiani
  • Luca Gambarelli
  • Silvia Muzzioli

Abstract

The SKEW index of the Chicago Board Options Exchange (CBOE), launched in February 2011, measures the tail risk not fully captured by the VIX index. In this paper we introduce, for the first time, a skewness index for the Italian stock market (ITSKEW) and investigate the pairwise and trilateral relations of this index with volatility and market returns. The results are compared with those of the US market. Data for the period 3 January 2011 to 29 December 2017 are used and three main results are found. First, in both the US and the Italian markets, the skewness index acts as a measure of market greed, as opposed to market fear, in the sense that it captures investor excitement to a larger extent than investor fear. Second, increases in the skewness index are related to returns with high significance in the Granger causality test, while the reverse is not the case. Last, volatility and skewness may give conflicting signals. When skewness and volatility indices move in the same direction, investors should rely on volatility because it has a stronger influence on market returns. The implications for investors and policy-makers are outlined.

Suggested Citation

  • Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2021. "The skewness index: uncovering the relationship with volatility and market returns," Applied Economics, Taylor & Francis Journals, vol. 53(31), pages 3619-3635, July.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:31:p:3619-3635
    DOI: 10.1080/00036846.2021.1884837
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    Cited by:

    1. Nappo, Giovanna & Marchetti, Fabio Massimo & Vagnani, Gianluca, 2023. "Traders’ heterogeneous beliefs about stock volatility and the implied volatility skew in financial options markets," Finance Research Letters, Elsevier, vol. 53(C).
    2. Zhang, Xinxin & Bouri, Elie & Xu, Yahua & Zhang, Gongqiu, 2022. "The asymmetric relationship between returns and implied higher moments: Evidence from the crude oil market," Energy Economics, Elsevier, vol. 109(C).
    3. Giovanni Campisi & Silvia Muzzioli & Fabio Tramontana, 2021. "Uncertainty about fundamental, pessimistic and overconfident traders: a piecewise-linear maps approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 707-726, December.
    4. Niu, Zibo & Ma, Feng & Zhang, Hongwei, 2022. "The role of uncertainty measures in volatility forecasting of the crude oil futures market before and during the COVID-19 pandemic," Energy Economics, Elsevier, vol. 112(C).
    5. Gambarelli, Luca & Marchi, Gianluca & Muzzioli, Silvia, 2023. "Hedging effectiveness of cryptocurrencies in the European stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    6. Marianna Brunetti & Roberta De Luca, 2023. "Pairs trading in the index options market," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 13(1), pages 145-173, March.

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