The Economic Significance of Conditional Skewness in Index Option Markets
Journal of Futures Markets, Forthcoming
Posted: 24 Apr 2009
Date Written: April 23, 2009
This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness-based option-pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward-looking option implied volatilities, can significantly improve the performance of skewness-based trades but trading costs considerably weaken the profitability of index option strategies.
Keywords: Key Words: conditional volatility, conditional skewness, out-of sample forecasting, option trading, trading costs
JEL Classification: G10, G14
Suggested Citation: Suggested Citation