RT Journal Article
SR Electronic
T1 Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 89
OP 105
DO 10.3905/jod.2013.21.2.089
VO 21
IS 2
A1 Ryan Ratcliff
YR 2013
UL https://pm-research.com/content/21/2/89.abstract
AB Much real-world research on options has focused on the Black–Scholes implied volatility smile/skew. What causes it? How does it behave? What information does it contain, and can it be used somehow to predict future returns on the underlying asset? Some evidence in the literature suggests that the skew contains a small amount of information about future returns, with a positive skew being a weak signal that the asset’s price will rise the next day. In this article, Ratcliff explores whether and how returns respond to the behavior of the skew, as measured by the implied volatility (IV) difference between an out-of-the-money (OTM) call and an OTM put with the same degree of moneyness.TOPICS: Options, statistical methods