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The economic significance of conditional skewness in index option markets
Author(s) -
Jha Ranjini,
Kalimipalli Madhu
Publication year - 2010
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20414
Subject(s) - skewness , index (typography) , economics , econometrics , profitability index , financial economics , valuation of options , computer science , finance , world wide web
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