What Does Implied Volatility Skew Measure?
Commodity Futures Trading Commission
May 1, 2010
This paper provides theoretical guidance and empirical analysis aimed at differentiating among implied volatility skew measures. Industry analysts and academics use a variety of measures, but most have little formal justification. I find that most commonly used skew measures are difficult to interpret without controlling for the levels of both volatility and kurtosis. Many ad hoc measures fail to meet the conditions for a valid skewness ordering. My preferred measure is the (25 delta put volatility - 25 delta call volatility)/50 delta volatility; among the measures considered, it is the most descriptive and least redundant.
Number of Pages in PDF File: 40
Keywords: Options, Implied Volatility Skew
JEL Classification: G13
Date posted: June 2, 2010