The objective of this study is threefold. First, we investigate the properties of a skewness index in order to determine whether it captures fear (fear of losing money), or greed in the market (fear of losing opportunities). Second, we uncover the combined relationship among skewness, volatility and returns. Third, we provide further evidence and possible explanations for the relationship between skewness and future returns, which is highly debated in the literature. The stock market investigated is the Italian one, for which a skewness index is not traded yet. The methodology proposed for the construction of the Italian skewness index can be adopted for other European and non-European countries characterized by a limited number of option prices traded. Several results are obtained. First, we find that in the Italian market the skewness index acts as measures of market greed, as opposed to market fear. Second, for almost 70% of the daily observations, the implied volatility and the skewness index move together but in opposite directions. Increases (decreases) in volatility and decreases (increases) in the skewness index are associated with negative (positive) returns. Last, we find strong evidence that positive returns are reflected both in a decrease in the implied volatility index and in an increase in the skewness index the following day. Implications for investors and policy makers are drawn.

Elyasiani, E., L., Gambarelli e Silvia, Muzzioli. "The properties of a skewness index and its relation with volatility and returns" Working paper, DEMB WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi - Università di Modena e Reggio Emilia, 2018. https://doi.org/10.25431/11380_1167022

The properties of a skewness index and its relation with volatility and returns

Gambarelli L.;Muzzioli Silvia
2018

Abstract

The objective of this study is threefold. First, we investigate the properties of a skewness index in order to determine whether it captures fear (fear of losing money), or greed in the market (fear of losing opportunities). Second, we uncover the combined relationship among skewness, volatility and returns. Third, we provide further evidence and possible explanations for the relationship between skewness and future returns, which is highly debated in the literature. The stock market investigated is the Italian one, for which a skewness index is not traded yet. The methodology proposed for the construction of the Italian skewness index can be adopted for other European and non-European countries characterized by a limited number of option prices traded. Several results are obtained. First, we find that in the Italian market the skewness index acts as measures of market greed, as opposed to market fear. Second, for almost 70% of the daily observations, the implied volatility and the skewness index move together but in opposite directions. Increases (decreases) in volatility and decreases (increases) in the skewness index are associated with negative (positive) returns. Last, we find strong evidence that positive returns are reflected both in a decrease in the implied volatility index and in an increase in the skewness index the following day. Implications for investors and policy makers are drawn.
Settembre
DEMB Working Paper Series
Elyasiani, E.; Gambarelli, L.; Muzzioli, Silvia
Elyasiani, E., L., Gambarelli e Silvia, Muzzioli. "The properties of a skewness index and its relation with volatility and returns" Working paper, DEMB WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi - Università di Modena e Reggio Emilia, 2018. https://doi.org/10.25431/11380_1167022
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1167022
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