communication: Towards a skewness index for the Italian stock market
speaker: Elyas Elyasianispeaker: Luca Gambarelli
speaker: Silvia Muzzioli
abstract: The aim of this paper is twofold. First, to compare and contrast different measures of asymmetry of the Italian index options return distribution including the CBOE SKEW index formula adapted to the Italian market and a modelfree measure based on the Faff and Liu (2014). Second, to investigate the sources of profitability of portfolio strategies (named skewness assets) based on the difference between the implied and realized third moment. This is in line with Bali and Murray (2013), who create three different portfolios (a PUT asset, a CALL asset, and a PUTCALL asset) in order to disentangle the contribution to the profitability of differences between the physical and the riskneutral distribution that can be attributed to the left part, the right part or both sides of the distribution. The data set consists of FTSE MIB daily index options data and covers the time period January 2011 - November 2014. We divide the sample into volatile (January 2011 - July 2012) and stable periods (August 2012 – November 2014): this allows us to contrast the pattern of skewness in the Italian stock index in different volatility periods. Several results are obtained. First, the Italian SKEW index presents many advantages with respect to other asymmetry measures: it has a significant contemporaneous relation with market index returns and modelfree implied volatility and is still a significant factor in explanation of market index returns, even after having controlled for modelfree implied volatility. Second, there is a negative relationship between model-free implied volatility changes and changes in the Italian SKEW index indicating that an increase in modelfree implied volatility is associated with a decrease in the Italian SKEW index (less negative risk neutral distribution). Third, in the Italian market, the SKEW index acts as a measure of market greed (the opposite of market fear), since returns react positively to an increase in the SKEW index; however the effect is asymmetric: returns react more negatively to a decrease in the SKEW index (increase in risk neutral skewness) than they react positively to an increase of the latter (decrease in risk neutral skewness). The results show that in the Italian market there exist a negative skewness risk premium: selling out-of-the-money puts and buying outofthemoney calls is on average profitable. The skewness risk premium is higher in the low volatility period: in bullish market periods investors expect a more negatively skewed risk-neutral distribution than it is subsequently realized.
timetable:
Thu 28 Jan, 17:30 - 19:00, Sala Azzurra
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