What Does Implied Volatility Skew Measure?

Mixon, Scott

doi:10.2139/ssrn.1618602

Cited by 9 publications

(5 citation statements)

References 17 publications

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“…***, ** and * represent significance at the 1, 5 and 10 percent level, respectively. smirk measure similar to that which is recommended by Mixon (2011) and utilised by Carr and Wu (2007) and Mixon (2009). We compute standardised smirk (StSMIRK) according to the following equation: where SMIRK i,t is computed as described previously and…”

Section: Analysis With An Alternative Smirk Measurementioning

confidence: 99%

Environmental, social, and governance practices and perceived tail risk

Shafer

Szado

2019

Accounting & Finance

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Using the implied volatility smirk on individual equity securities to measure perceived tail risk, we find that better environmental, social and governance (ESG) practices significantly reduce ex‐ante expectations of a left‐tail event. Our findings are robust to using multiple model specifications and to adjusting for potential endogeneity concerns. We also show that, while practices in each ESG pillar are important in reducing perceived tail risk, the environmental pillar plays the most important role. Our results indicate that investors consider strong ESG practices to be insurance against left‐tail events rather than wasteful investment borne out of managers’ own values or self‐interest.

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Section: Analysis With An Alternative Smirk Measurementioning

confidence: 99%

Environmental, social, and governance practices and perceived tail risk

Shafer

Szado

2019

Accounting & Finance

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“…The skewness of option prices on the S&P 500 is approximated using (25 Delta put volatility-25 Delta call volatility)/50 Delta volatility where Delta stands for the degree to which an option is exposed to shifts in the price of the underlying asset. This skewness measure is scaled down by a factor of 3 to match the equivalent skewness parameter of the risk neutral density function (Mixon 2011). C.D.…”

Section: Resultsmentioning

confidence: 99%

“…The framework assumes that the option-implied distribution generates a volatility curve that is linear in delta. This model is considered as more empirically plausible than one assuming linearity in the percentage strike model(Mixon 2011). Among measures based on the slope of the implied volatility curve, this measure is the least correlated with the level of implied volatility.…”

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confidence: 99%

Quantifying Uncertainties in Global Growth Forecasts

Ohnsorge¹,

Stocker²,

Some³

2016

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The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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“…Interest has more recently expanded to other implied moments, such as those of the underlying asset distributions that are constructed from option prices, not only because of their relevance to provide a clearer picture of current market expectations (Vergote and Puigvert, ; Vesela and Puigvert, ; Sihvonen and Vähämaa, ), but also because of their predictive and forward looking power in decision and policy making (Mixon, ; DeMiguel et al ., ; Driessen et al ., ; Atilgana et al ., ). The implied volatility (Atilgana et al ., ), correlation (Skintzi and Apostolos, ; Driessen et al ., ), skewness (Mixon, ; DeMiguel et al ., ) and kurtosis (DeMiguel et al ., ) all help to improve significantly the understanding of expectations, risk management and asset return predictability. For example, when modelling risk scenarios, larger‐than‐usual implied tails or skewness will have a differential content of information about the market's beliefs beyond the information that is available only in the implied second moment.…”

Section: Introductionmentioning

confidence: 99%

A Bayesian Time Varying Approach to Risk Neutral Density Estimation

Casarin

Molina

Horst

2018

Journal of the Royal Statistical Society Series A: Statistics in Society

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Summary We expand the literature of risk neutral density estimation across maturities from implied volatility curves, which are usually estimated and interpolated through cubic smoothing splines. The risk neutral densities are computed through the second derivative, which we extend through a Bayesian approach to the problem, featuring an extension to a multivariate setting across maturities and over time, a flexible estimation approach for the smoothing parameter, which is traditionally assumed common to all assets, known and fixed across maturities and time, but now potentially different between assets and maturities, and over time, and information borrowing about the implied curves and risk neutral densities not only across different option maturities, but also dynamically.

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What Does Implied Volatility Skew Measure?

Cited by 9 publications

References 17 publications

Environmental, social, and governance practices and perceived tail risk

Environmental, social, and governance practices and perceived tail risk

Quantifying Uncertainties in Global Growth Forecasts

A Bayesian Time Varying Approach to Risk Neutral Density Estimation

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