Hitting SKEW for SIX

49 Pages Posted: 19 Dec 2012 Last revised: 3 Jun 2016

See all articles by Zhangxin Frank Liu

Zhangxin Frank Liu

The University of Western Australia Business School

Robert W. Faff

University of Queensland

Date Written: May 29, 2016

Abstract

In this study, we propose "SIX" as a new forward-looking index of negative market skew derived from state-preference pricing. Specifically, SIX is a forecast of the ratio of lower to upper partial moment volatility over a 30-day horizon, for SPX market returns. Using SPX options data from 1996 to 2013, we conduct a comparison between SIX and the CBOE SKEW index. First, we document that the daily change in VIX and SIX (SKEW) are negatively (positively) related. Second, we show that the daily change of SIX (SKEW) adds (does not add) significant explanatory power for predicting the one-day ahead return. Third, though biased, SIX produces an efficient forecast of future physical skewness. In contrast, there is no statistically significant relationship between SKEW and physical skewness. Collectively, our results suggest that as an indicator of institutional anxiety, both theoretically and in practice, SIX (SKEW) is a more than useful (questionable) complement to VIX

Keywords: Skewness Index; Risk-Neutral Moments; SKEW; VIX; State-Preference Pricing

JEL Classification: D81, G10, G17

Suggested Citation

Liu, Zhangxin (Frank) and Faff, Robert W., Hitting SKEW for SIX (May 29, 2016). 2013 Financial Markets & Corporate Governance Conference; 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2190724 or http://dx.doi.org/10.2139/ssrn.2190724

Zhangxin (Frank) Liu (Contact Author)

The University of Western Australia Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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