Asymmetric Volatility Risk: Evidence from Option Markets

Jens Jackwerth and Grigory Vilkov

Review of Finance, 2019, vol. 23, issue 4, 777-799

Abstract: Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions (RNDs) of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate RND cannot be inferred from the marginals, we propose a novel identification based on long-dated index options. We estimate the risk-neutral asymmetric volatility implied correlation (AVIC) and find it to be significantly lower than its realized counterpart. We interpret the economics of the asymmetric volatility correlation risk premium and use AVIC to predict returns, volatility, and risk-neutral quantities.

Keywords: Asymmetric volatility; VIX options; Volatility trading; Leverage effect; Risk-neutral distribution (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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