Hitting SKEW for SIX

Zhangxin (Frank) Liu, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

6 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)449-464
Number of pages16
JournalEconomic Modelling
Volume64
DOIs
Publication statusPublished - Aug 2017
Externally publishedYes

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