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1 January 2010 Financial Analysts Journal Volume 66, Issue 1

Implications for Asset Returns in the Implied Volatility Skew

  1. James S. Doran
  2. Kevin Krieger

This study examined the impact on future asset returns of information contained in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. The findings discourage the use of skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions.

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