What Does Implied Volatility Skew Measure?
40 Pages Posted: 2 Jun 2010
Date Written: 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.
Keywords: Options, Implied Volatility Skew
JEL Classification: G13
Suggested Citation: Suggested Citation