Asymmetric Volatility Risk: Evidence from Option Markets

34 Pages Posted: 15 Sep 2013 Last revised: 16 Jul 2018

See all articles by Jens Carsten Jackwerth

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Grigory Vilkov

Frankfurt School of Finance & Management

Date Written: July 3, 2018

Abstract

Asymmetric volatility concerns the relation of returns to future expected volatility. Much is known from option prices about the marginal risk-neutral distributions of S&P 500 returns and of relative changes in future expected volatility (VIX). While the bivariate risk-neutral distribution 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 and find it to be significantly lower than its realized counterpart. We interpret the economics of the asymmetric volatility correlation risk premium and use asymmetric volatility implied correlation to predict returns, volatility, and risk-neutral quantities.

Keywords: Asymmetric volatility, SPX options, VIX options, asymmetric volatility implied correlation, leverage effect, trading strategy

JEL Classification: G11, G12, G13, G17

Suggested Citation

Jackwerth, Jens Carsten and Vilkov, Grigory, Asymmetric Volatility Risk: Evidence from Option Markets (July 3, 2018). Available at SSRN: https://ssrn.com/abstract=2325380 or http://dx.doi.org/10.2139/ssrn.2325380

Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

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