Asymmetry Matters: A High-Frequency Risk-Reward Trade-Off

46 Pages Posted: 1 May 2011 Last revised: 26 Jun 2012

See all articles by Johannes Breckenfelder

Johannes Breckenfelder

European Central Bank (ECB) - Financial Research

Roméo Tédongap

ESSEC Business School

Date Written: June 26, 2012


Expected returns should not only include rewards for accepting the risk of a potential downside loss, but also discounts for potential upside gains. Since investors care differently about upside gains versus downside losses, they require a risk premium for bearing the relative downside risk. We validate this perception empirically as well as theoretically and show that conditional asymmetry forecasts equity market returns in the short run. The results hold not only for different return series and different data frequencies (daily and intra-daily) but also for various subsamples. Our short-term expected return predictor, the asymmetric realized volatility measure, captures more variation in equity returns than the variance risk premium, a forward-looking measure, or the price-earnings ratio, and can easily be extracted from realized return series. We formalize this intuition with a closed-form asset pricing model that incorporates disappointment aversion and time-varying macroeconomic uncertainty.

Keywords: realized variance, realized semivariance, stock market return predictability, asymmetric realized volatility, variance risk premium, high-frequency data, equilibrium asset pricing

JEL Classification: G1, G12, G11, C1, C5

Suggested Citation

Breckenfelder, Johannes and Tédongap, Roméo, Asymmetry Matters: A High-Frequency Risk-Reward Trade-Off (June 26, 2012). Available at SSRN: or

Johannes Breckenfelder (Contact Author)

European Central Bank (ECB) - Financial Research ( email )

Sonnemannstrasse 20
D-60314 Frankfurt am Main


Roméo Tédongap

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
+33134439734 (Phone)
+33134439734 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics