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Interpreting the Relationship Between Realized and Implied Volatility Skew

Article Quant Q&A · Author: user61297
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Summary

The document raises a research question about whether realized volatility relative to implied volatility is associated with changes in options skew. It reports an expected pattern—skew steepening when realized volatility exceeds implied volatility—but says a regression did not reveal the relationship. It also asks whether hedgers buying tail protection could provide a theoretical explanation.

No data, regression details, or answer are provided, so the proposed relationship remains unverified in this document. It does not define the volatility or skew measures, specify the options market or sample period, or discuss controls and estimation choices. The text is useful as a statement of a testable hypothesis and an open question, rather than as evidence that the relationship holds or fails. Further analysis would need clear measure definitions and empirical design before supporting a conclusion.

Key ideas

  • The document proposes that realized volatility exceeding implied volatility may coincide with steeper options skew.
  • The author reports finding no such association in a regression, but gives no model details.
  • Demand for tail hedges is suggested as a possible theoretical mechanism.
  • The document provides no data or answer establishing the proposed relationship.

Tags

OptionsVolatilityStatistics
Full text
# The relationship btwn RV-IV and realized skew


# The relationship btwn RV-IV and realized skew












In studying skew I've been advised to focus on understanding on components that affect it. One such component that's been recommended to me is the relationship btwn RV-IV and realized skew. Allegedly, there should be a strong correlation btwn the 2 (skew steepens when RV exceeds implied), but when I regress one on the other, I find no such relationship. Am I wasting my time?

I also cannot think of some fundamental theory that might explain the relationship. What would be the theoretical underpinning for why this happens? Hedgers buying tails?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.