Asymmetric Volatility Risk: Evidence from Option Markets

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