Abstract
This paper studies the implied volatility (IV) smirks in four commodity markets by adopting Zhang and Xiang's methodology. First, we document the term structure and dynamics of IV smirks. Overall, the commodity IV curves are negatively skewed with a positive curvature. Then we analyze the commodity and S&P 500 returns' predictability based on in-sample and out-of-sample tests and find that the information embedded in IV smirks can significantly predict monthly commodity and S&P 500 returns. For example, the risk-neutral fourth cumulant (FC) from the crude oil market outperforms all of the standard predictors in predicting the S&P 500 returns.