This study disentangles a measure of implied skewness that is related to downward movements in the U.S. equity index from the corresponding implied skewness that is associated with upward movements. A positive SKEW index is constructed from S&P 500 call options, whereas a negative SKEW index is constructed from the S&P 500 put options. We show that the positive SKEW is linked to market sentiment, whereas the negative SKEW is related to existing tail risk measures. The negative SKEW is proposed as a more objective prudent tail risk measure, and it is found to be able to predict recessions, market downturns, and uncertainty indicators up to one year in advance. The predictive power of the negative SKEW is also confirmed when we control for other tail risk measures and also out-of-sample.

<div> We propose option realized semivariances and signed jumps as new “observable quantities” to summarize the asymmetric information contained in the sign of high-frequency option returns. These measures successfully capture the direction of the discontinuities related to both the underlying asset and risk factor, yielding incremental information not contained in the aggregate option realized measures. Using options data on S&P 500 ETF (SPY) and 15 individual equities, we document that the negative (positive) semivariance and signed jump of out-of-the-money call (put) options play a prominent role in predicting future variance, variance risk-premia, and excess monthly returns. Out-of-sample volatility timing strategies based on these measures generate economically significant gains of up to 206 basis points annually for risk-averse investors. </div>

Abstract This paper introduces forward-looking measures of the network connectedness of fears in the financial system arising due to the good and bad beliefs of market participants about uncertainty that spreads unequally across a network of banks. We argue that this asymmetric network structure extracted from call and put traded option prices of the main U.S. banks contains valuable information for predicting macroeconomic conditions and economic uncertainty, and it can serve as a tool for forward-looking systemic risk monitoring.