We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
GBP/USD
Bullish
USD/JPY
Mixed
Gold
Bullish
Oil - US Crude
Mixed
Bitcoin
Bearish
More View more
Real Time News
  • #Forex Forecast via @DailyFX: US Dollar Technical Outlook on $DXY, $AUDUSD, $USDCAD, $USDJPY & $EURUSD Full Analysis ⬇️ https://www.dailyfx.com/forex/technical/article/fx_technical_weekly/2019/11/17/usd-price-us-dollar-chart-forecast-dxy-audusd-usdcad-usdjpy-eurusd.html
  • Further escalation in Hong Kong will likely bode poorly for risk appetite https://t.co/0NjUd3ahBu
  • How should you trade around event risks and what steps can you take to improve your trading psychology? Find out from @JoelKruger, a trading consultant and mentor. Only on Global Markets Decoded. Missed the episode? Read up here:https://t.co/JWIGJk4vKa https://t.co/WB39x4GP99
  • Poll - Does your personality match your #tradingstyle? Vote and find out from @WVenketas here: https://t.co/vREsUIWSJd https://t.co/Ft0ExAmMpq
  • #Dow Jones hits record high, however, central bank liquidity prompts volatility implosion. #FTSE 100 among underperformers with focus remaining on politics. Get your #equities market update from @JMcQueenFX here: https://t.co/EOFleGSeBp https://t.co/ecAyfSUeAM
  • RT @C_Barraud: 🇪🇺 #ECB’s Muller Says More Assets Could Join Stimulus List in Slump - Bloomberg https://t.co/roGEgu0VTQ
  • With increasing volatility in weather patterns, how might storms, hurricanes and floods rattle the supply chain for petroleum-based products and impact crude oil prices? Find out from @JStanleyFX here:https://t.co/O4dgBl47fq https://t.co/OQYqZAYt9S
  • Currency Strategist,@PaulRobinsonFX is a Swing trader. What is your #tradingstyle? Take the quiz and let us know: https://t.co/LPBOcS0Vtd https://t.co/WzRYeqRhUL
  • Despite what your #tradingstyle is, you should be keeping a trading journal. How can you start keeping a trading journal? Find out: https://t.co/0akgWbyJEw https://t.co/4ehMlN4zv1
  • The Euro’s struggle to move higher against a range of currencies continues and without further support this is likely to continue into the year-end. Get your $EURUSD market update from @nickcawley1 here: https://t.co/myZ7R0eGUb https://t.co/12WJd53Cx4
Volatility: The SKEW Index and Stock Market Crashes

Volatility: The SKEW Index and Stock Market Crashes

2019-06-03 20:25:00
Peter Hanks, Junior Analyst
Share:

The SKEW Index and Stock Market Crashes:

  • Despite rising global uncertainty, an indicator that tracks the potential for a Black Swan event has slipped to decade-lows
  • But according to past performance, the Index has been a poor indicator of stock market volatility
  • Interested in stock market volatility? Check out an introductory article on CBOE’s VIX Index

Volatility: The SKEW Index and Stock Market Crashes

The recent bout of stock market turbulence has seen volatility levels tick higher, but lack a significant surge. On the other hand, one lesser-watched index that seeks to measure the probability of tail-risk events extreme moves higher or more often lower - recently matched its lowest reading from the past decade. The SKEW Index, curated by the Chicago Board of Options Exchange (CBOE), ticked beneath 112 on May 29 – just the third such occurrence since April 2009.

S&P 500 and SKEW Index

The SKEW Index measures the perceived tail-risk in the S&P 500 – based on the implied volatility of out-of-the-money options, whereas the VIX considers the implied volatility of at-the-money options. “Tail risk” is the chance that an event will occur outside one standard deviation from the mean. Given how the Index is derived, it measures the slope of implied volatility – which can then be displayed as the probability of a two or three standard deviation move for the S&P 500 in the next 30 days.

Will the Stock Market Crash in 2019?

That probability is then reflected within a range - typically from 100 to 150 - where a higher reading suggests the market is perceiving greater risk of a Grey Swan event. At 130, there is approximately a 10% chance of the S&P 500 making a two-standard deviation move over the next thirty days – while the probability of a three-standard deviation move is just 2%.

SKEW Index probabilities

Source: CBOE

Although it attempts to gauge the market’s view on tail-risk and financial crashes, it does not provide insight on whether a statistically anomalous event will actually take place. Further, SKEW is a poor indicator of stock market volatility according to historical performance – especially with the Black or Grey Swan events it tries to forecast. Since 2000, the 5-largest single-day draw downs for the S&P 500 had average SKEW reading of 113.53 the day before the decline.

S&P 500 crashes and SKEW reading

Thus, the SKEW Index provides little value when attempting to gauge these extreme sell-offs. It does however, offer insight on investor sentiment. Like the VIX, SKEW can display heightened levels of investor fear – even without a simultaneous drawdown in price. That said, the notably low reading on May 28 is concerning as the S&P 500 continues to slide – while option traders see little chance of a crash, so much so that it may suggest complacency. For other equity analysis, follow @PeterHanksFX on Twitter.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more: Grey Swans: Low Probability Events to watch for in 2019

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.