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The economic significance of conditional skewness in index option markets

✍ Scribed by Ranjini Jha; Madhu Kalimipalli

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
279 KB
Volume
30
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness‐based option‐pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward‐looking option implied volatilities, can significantly improve the performance of skewness‐based trades but trading costs considerably weaken the profitability of index option strategies. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:378–406, 2010

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