With the Black Swan Index falling to a 10-year low, is the volatile market actually safe?

SMM News: despite rising global uncertainty, the SKEW index, which measures the possibility of black swan events, has fallen to a 10-year low. However, judging from its past performance, the index has performed generally in measuring stock market volatility.

In the latest round of stock market turmoil, market volatility has risen, but not sharply. On the other hand, the SKEW index, a less noticed index, recently fell to a 10-year low. The index is used to measure the likelihood of extreme movements in tail risk events. ­this index is compiled by the Chicago Board of options Exchange (CBOE). On May 29, the index fell below 112 for the third time since April 2009.

The SKEW measures the possible tail risk of the S & P 500. This index measures the implied volatility outside the currency option market, while the VIX index measures the implied volatility of the currency option market. According to the derivation of this index, it measures the slope of implied volatility, in other words, the likelihood that the S & P 500 will deviate by two or three standard deviation over the next 30 days. For more medium-and long-term analysis strategies of the stock index, please see the latest outlook for this quarter.

This possibility is then reflected in a specific range-usually between 100 and 150-and the higher the data, the higher the likelihood of a gray swan event. When the data is at 130, there is a 10% chance that the S & P 500 will deviate from two standard deviation in the next 30 days, while the probability of three standard deviation is only 2%.

Although this measure measures tail risk and the likelihood of a collapse in financial markets, the index does not provide information on whether the abnormal events measured actually occur. Moreover, from a historical point of view, the index does not play a good role in measuring stock market volatility, especially the black swan event or gray swan event. Since 2000, the average reading for the SKEW has been 113.53 before the S & P 500 suffered its five biggest one-day falls.

As a result, the index has a limited predictive role in measuring extreme selling in the market. However, the index provides information about investor sentiment. Like the VIX index, the SKEW index reflects heightened investor concerns, even if they do not fall at the same time. Based on this, it is important to note that the index recorded a fairly low level on May 28, as the S & P 500 continued to fall. At present, however, option market traders believe that there is little chance of a market collapse, which may suggest that investors are overconfident.

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