Asymmetric Volatility Risk: Evidence from Option Markets. (14th July 2018)

• Record Type: Journal Article
• Authors: Jackwerth, Jens; Vilkov, Grigory
• Is Part Of: Review of finance. Volume 23:Number 4(2019)
• Page Start: 777
• Page End: 799
• Publication Date: 2018-07-14
• Subjects: Asymmetric volatility -- VIX options -- Volatility trading -- Leverage effect -- Risk-neutral distribution; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfy025
• Languages: English
• ISSNs: 1572-3097

Abstract

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.