Skew Index Descriptive Analysis, Predictive Power, And Short-Term Forecast

This paper analyzes the behavior of the Chicago Board Options Exchange® Skew Index, which is calculated using the S&P 500’s tail risk price, specifically from the Out-of-The-Money option prices. The Skew Index seems to reveal salient information for expected financial downturns. The paper introduces main descriptive statistics for this index, scarcely studied in the literature, on monthly basis from January 1990 to December 2018. The predictive capacity of the Skew Index together with other proposed fear indices is analyzed for the S&P 500 index, and finally, various ARIMA-GARCH models are employed to test the forecasting power of the Skew Index. Our results show that the Skew Index seems to be an adequate indicator as a fear index and that the MA(4)-EGARCH(1,3) specification is an appropriate model to forecast the monthly observations of the Skew Index.

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