Asymmetric Pricing of Implied Systematic Volatility in the Cross-Section of Expected Returns

Journal of Futures Markets 31 (January 2011), pp. 34-54

32 Pages Posted: 4 Aug 2010 Last revised: 15 Nov 2012

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

James Doran

University of New South Wales

David R. Peterson

Florida State University - Department of Finance

Abstract

Assuming a symmetric relation between returns and innovations in implied market volatility, Ang, Hodrick, Xing, and Zhang (2006) find that sensitivities to changes in implied market volatility have a cross-sectional effect on firm returns. Dennis, Mayhew, and Stivers (2006), however, find an asymmetric relation between firm-level returns and implied market volatility innovations. We incorporate this asymmetry into the cross-sectional relation between sensitivity to volatility innovations and returns. Using both portfolio sorting and firm-level regressions, we find that sensitivity to VIX innovations is negatively related to returns when volatility is rising, but is unrelated when it is falling. The negative relation is robust to controls for other variables, suggesting only the increase in implied market volatility is a priced risk factor.

Keywords: Asymmetric Volatility, VIX, Portfolio Returns, Risk Pricing

JEL Classification: G10, G11, G12

Suggested Citation

DeLisle, Jared and Doran, James and Peterson, David R., Asymmetric Pricing of Implied Systematic Volatility in the Cross-Section of Expected Returns. Journal of Futures Markets 31 (January 2011), pp. 34-54. Available at SSRN: https://ssrn.com/abstract=1652839

Jared DeLisle (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

James Doran

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

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