Hitting SKEW for SIX

Liu, Zhangxin (Frank) and Faff, Robert (2017) Hitting SKEW for SIX. Economic Modelling, 64 449-464. doi:10.1016/j.econmod.2017.02.026

Author Liu, Zhangxin (Frank)
Faff, Robert
Title Hitting SKEW for SIX
Journal name Economic Modelling   Check publisher's open access policy
ISSN 0264-9993
Publication date 2017-08-01
Sub-type Article (original research)
DOI 10.1016/j.econmod.2017.02.026
Open Access Status Not yet assessed
Volume 64
Start page 449
End page 464
Total pages 16
Place of publication Amsterdam, Netherlands
Publisher Elsevier BV
Language eng
Abstract In this study, we propose “SIX” as a new forward-looking index of negative market skew derived from state-preference pricing. Specifically, SIX is a forecast of the ratio of lower to upper partial moment volatility over a 30-day horizon, for SPX market returns. Using SPX options data from 1996 to 2013, we conduct a comparison between SIX and the CBOE SKEW index. First, we document that the daily change in VIX and SIX (SKEW) are negatively (positively) related. Second, we show that the daily change of SIX (SKEW) adds (does not add) significant explanatory power for predicting the one-day ahead return. Third, though biased, SIX produces an efficient forecast of future physical skewness. In contrast, there is no statistically significant relationship between SKEW and physical skewness. Collectively, our results suggest that as an indicator of institutional anxiety, both theoretically and in practice, SIX (SKEW) is a more than useful (questionable) complement to VIX.
Keyword Risk-neutral moments
Skewness index
State-preference pricing
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
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