Research finds the slope of the options skew is a relatively weak forecasting tool
By Mark Bradshaw, professor at Boston
Crash risk in security prices has
attracted increased attention in recent years, particularly
since the 2008 financial crisis. Firm-specific price crashes
are another concern for investors. A firm-specific price crash
is when an individual stock goes down, but the entire market
isn’t affected. Understanding firm-specific
characteristics that can predict extreme outcomes is critical
A recent paper from four Boston College
professors, entitled "Can Skew Help Investors Predict Positive
or Negative Market Outcomes?" focuses on the occurrences of
large stock price declines and the ability of option prices and
other variables to predict them. While the crash risk varies,
there are several indicators that can impact a
firm’s financial outcomes. These include:
price-to-book ratio, recent sales growth and the use of
external financing. The paper from Mark Bradshaw, Amy Hutton,
Alan Marcus and Hassan Tehranian explores: If these
indicators can predict the crash risk, does the market
recognize their predictive value and price it into the options
This article is available to subscribers and registered users
Please log in to continue reading.
Not yet registered? Take a free trial.
If you have already taken a free trial you
have ongoing access to the analysis section of FOW.com including this story.
Log in using your details below to read.
Already have an account? |