The implied volatility skew observed in stock indices cannot be attributed to which of the following reasons?
A) The distribution of index returns is non-normal.
B) The skewness of index returns is much greater than zero.
C) The excess kurtosis of index returns is much greater than zero.
D) There is crash risk in the index.

Question

Quizplus · Accepted Answer

The skewness of index returns being much greater than zero actually contributes to the implied volatility skew, as it reflects the asymmetry in the distribution of returns. The correct answer is that the skewness of index returns being much greater than zero is not a reason that cannot be attributed to the implied volatility skew; rather, it's a contributing factor. The question asks for a reason that cannot be attributed to the implied volatility skew, making the other options (A, C, D) incorrect because they are all reasons that can contribute to the implied volatility skew.

The Implied Volatility Skew Observed in Stock Indices Cannot Be