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The SKEW index: extracting what has been left

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  • Bevilacqua, Mattia
  • Tunaru, Radu

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.

Suggested Citation

  • Bevilacqua, Mattia & Tunaru, Radu, 2021. "The SKEW index: extracting what has been left," LSE Research Online Documents on Economics 108198, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:108198
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    File URL: http://eprints.lse.ac.uk/108198/
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    More about this item

    Keywords

    financial stability; implied skewness; market downturns; market sentiment; tail risk; ES/K002309/1; ES/R009724/1;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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