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Fear or greed? What does a skewness index measure?

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Listed:
  • Elyas Elyasiani
  • Luca Gambarelli
  • Silvia Muzzioli

Abstract

The Chicago Board Options Exchange (CBOE) SKEW index is designed to capture investors’ fear in the US stock market. In this paper we pursue two objectives. First, we investigate the properties of the CBOE SKEW index in order to assess whether it captures fear or greed in the market. Second, we introduce and compare three measures of asymmetry of the Italian index options return distribution. These measures include: (i) the CBOE SKEW index adapted to the Italian market (we call it ITSKEW) and (ii) two model-free measures of skewness based on comparison of a bear and a bull index. Finally, we explore the existence and sign of the skewness risk premium. Several results are obtained. First, the Italian skewness index (ITSKEW) presents many advantages compared to the two model-free measures: it has a significant contemporaneous relation with market index returns and with model-free implied volatility. Both the ITSKEW and the CBOE SKEW indices act as measures of market greed (the opposite of market fear), since returns react positively to an increase in the skewness indices. Trading strategies show that the Italian market is characterized by a significant positive skewness risk premium.

Suggested Citation

  • Elyas Elyasiani & Luca Gambarelli & Silvia Muzzioli, 2016. "Fear or greed? What does a skewness index measure?," Department of Economics 0102, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    • Handle: RePEc:mod:depeco:0102
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    More about this item

    Keywords

    skewness index; risk-neutral moments; implied volatility; skewness risk premium.;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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