The Economic Significance of Conditional Skewness in Index Option Markets

Journal of Futures Markets, Forthcoming

Posted: 24 Apr 2009

See all articles by Ranjini Jha

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Date Written: April 23, 2009

Abstract

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

Jha, Ranjini and Kalimipalli, Madhu, The Economic Significance of Conditional Skewness in Index Option Markets (April 23, 2009). Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1394044

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Madhu Kalimipalli (Contact Author)

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

HOME PAGE: http://www.madhukalimipalli.com/

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