| dc.description.abstract | This paper uses the Jarrow and Rudd model (1982) to obtain implied volatility, implied skewness, and implied kurtosis. Then we use these implied parameters to do a series of empirical test. From our empirical results, we can obtain some conclusions. First, we extend Bakshi, Kapadia, and Madan’s research (2003) .We find that implied skewness and implied kurtosis have explanatory power for the slope and the curvature of smile. Our empirical results also verify Zhang’s conclusions (2004): the slope is related with risk-neutral skewness, and the curvature is related with risk-neutral kurtosis. Second, the implied volatility from the Jarrow and Rudd model is a biased estimator of the future volatility, but the implied volatility still contains information in forecasting the future volatility. Third, implied skewness contains the effect of market sentiment. The more optimistic the investors are, the more positive the skewness is. Fourth, implied skewness, implied kurtosis, and IIS (Investors intelligence sentiment survey) have effects on explaining the return. When the return is positive, the result shows the larger the positive change of the VIX is, the more optimistic the investors are. On the contrary, when the return is negative, the result shows the larger the positive change of the VIX is, the more pessimistic the investors are. Finally, we utilize implied volatility, implied skewness, and implied kurtosis to construct a new fear gauge index. The new index indeed has certain effect on measuring the level of the investors’ fear. | en_US |