The risk asymmetry index

Elyas Elyasani (), Luca Gambarelli () and Silvia Muzzioli ()

Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: The aim of this paper is to propose a simple and unique measure of risk, that subsumes the conflicting information in volatility and skewness indices and overcomes the limits of these indices in correctly measuring future fear or greed in the market. To this end, we exploit the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in risk-neutral distribution, i.e. the fact that investors like positive spikes in returns, while they dislike negative ones. We combine upside and downside implied volatilities in a single asymmetry index called the risk-asymmetry index (RAX). The risk-asymmetry index (RAX) plays a crucial role in predicting future returns, since it subsumes all the information embedded in both the Italian skewness index ITSKEW and the Italian volatility index (ITVIX). The RAX index is the only index that is able to indicate (when reaching very high values) a clearly risky situation for the aggregate stock market, which is detected neither by the ITVIX ?index nor by the ITSKEW index

Keywords: risk-neutral moments; model-free implied volatility; corridor implied volatility; skewness; skewness risk premium. (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: pages 36
Date: 2016-12
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:mod:wcefin:0061

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