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What Does Implied Volatility Skew Measure?

40 Pages Posted: 2 Jun 2010  

Scott Mixon

Commodity Futures Trading Commission

Date Written: May 1, 2010

Abstract

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.

Keywords: Options, Implied Volatility Skew

JEL Classification: G13

Suggested Citation

Mixon, Scott, What Does Implied Volatility Skew Measure? (May 1, 2010). Available at SSRN: https://ssrn.com/abstract=1618602 or http://dx.doi.org/10.2139/ssrn.1618602

Scott Mixon (Contact Author)

Commodity Futures Trading Commission ( email )

1155 21st Street NW
Washington, DC 20581
United States

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