This is a syndicated repost courtesy of Online Course Notes For Financial Markets and Banking. To view original, click here. Reposted with permission.
The Federal Reserve has been slowly normalizing monetary policy, more at the short-end of the Treasury curve. And the US is trying to normalize trade tariffs as well.
The result? CBOE Skew index (S&P 500 tail risk)* has risen to near all-time highs.
While the equity market skew (or fear) index is near the all-time high, the 10-year Treasury volatility measures remain subdued (the 10-year zero coupon Treasury volatility index is back to February 2008 levels).
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*What is S&P 500 tail risk? The risk of outlier returns two or more standard deviations below the mean. The Cboe SKEW Index (“SKEW”) is derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options.
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