Implications for Asset Returns in the Implied Volatility Skew

This study examined the impact on future asset returns of information contained in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out...

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Bibliographic Details
Published in:Financial analysts journal 2010-01, Vol.66 (1), p.65-76
Main Authors: Doran, James S., Krieger, Kevin
Format: Article
Language:English
Subjects:
Assets
ATMs
Business structures
Cost estimates
Equity
EQUITY INVESTMENTS
Exchange traded funds
Finance
Financial portfolios
Forecasts
Index funds
Investment strategies
Options markets
Price volatility
Put & call options
Return on equity
Securities markets
Securities prices
Skewness
Stock options
Stock prices
Studies
Transaction costs
Volatility
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Summary:This study examined the impact on future asset returns of information contained in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. The findings discourage the use of skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v66.n1.9