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Asymmetric Volatility Risk: Evidence from Option Markets

Author

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  • Jens Jackwerth
  • Grigory Vilkov

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.

Suggested Citation

  • Jens Jackwerth & Grigory Vilkov, 2019. "Asymmetric Volatility Risk: Evidence from Option Markets," Review of Finance, European Finance Association, vol. 23(4), pages 777-799.
    • Handle: RePEc:oup:revfin:v:23:y:2019:i:4:p:777-799.
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    File URL: http://hdl.handle.net/10.1093/rof/rfy025
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    Cited by:

    1. Hemei Li & Zhenya Liu & Shixuan Wang, 2022. "Vines climbing higher: Risk management for commodity futures markets using a regular vine copula approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2438-2457, April.

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