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
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: Suggested Citation