prevail until the options expire. It is possible to form a portfolio of call and put options so that the portfo-lio's payoff is very sensitive to the volatility of the underlying asset but only minimally sensitive to changes in the level of the underlying asset. Traders and investors who frequently buy or sell such portfolios do so with a view of the volatility of the underlying asset that does...

Volatility forecasting is one of the main issues in the financial econometrics literature. Volatility measures may be derived from statistical models for conditional variance, or from option prices. In recent times, indices have been suggested which summarize the implied volatility of widely traded market index options. One such index is the so-called VXN, an average of 30-day ahead implied vol...

To save space, we present some of our …ndings in the Online Appendix. In Section I, we investigate the intertemporal relation between various skewness measures and expected market returns. In Section II, we orthogonalize the implied volatility spread measures with respect to the implied variance, realized variance, physical skewness and risk-neutral skewness measures. In Section III, we orthogo...

While a great deal of attention has been focused on stochastic volatility in stock returns, there is strong evidence suggesting that return distributions have time-varying skewness and kurtosis as well. Under the risk-neutral measure, for example, this can be seen from variation across time in the shape of Black-Scholes implied volatility smiles. This paper investigates model characteristics th...