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Article

Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns

Ryan Ratcliff
The Journal of Derivatives Winter 2013, 21 (2) 89-105; DOI: https://doi.org/10.3905/jod.2013.21.2.089
Ryan Ratcliff
is an assistant professor of economics at the University of San Diego in San Diego, CA, and a visiting scholar at UCLA’s Anderson School of Management.
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  • For correspondence: ratcliff@sandiego.edu
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Abstract

Much real-world research on options has focused on the Black–Scholes implied volatility smile/skew. What causes it? How does it behave? What information does it contain, and can it be used somehow to predict future returns on the underlying asset? Some evidence in the literature suggests that the skew contains a small amount of information about future returns, with a positive skew being a weak signal that the asset’s price will rise the next day. In this article, Ratcliff explores whether and how returns respond to the behavior of the skew, as measured by the implied volatility (IV) difference between an out-of-the-money (OTM) call and an OTM put with the same degree of moneyness.

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The Journal of Derivatives: 21 (2)
The Journal of Derivatives
Vol. 21, Issue 2
Winter 2013
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Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns
Ryan Ratcliff
The Journal of Derivatives Nov 2013, 21 (2) 89-105; DOI: 10.3905/jod.2013.21.2.089

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Relative Option Prices and Risk-Neutral Skew as Predictors of Index Returns
Ryan Ratcliff
The Journal of Derivatives Nov 2013, 21 (2) 89-105; DOI: 10.3905/jod.2013.21.2.089
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  • Article
    • Abstract
    • THEORETICAL BACKGROUND ON RN SKEWNESS
    • DATA: CALCULATING THE SKEWNESS PREMIUM
    • OBSERVED SKEWNESS PREMIA AND THEORETICAL DETERMINANTS OF RN SKEWNESS
    • DISCUSSION: ECONOMIC SIGNIFICANCE OF PREDICTABILITY
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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