Variance Asymmetry Managed Portfolios

79 Pages Posted: 1 Feb 2018 Last revised: 20 Oct 2019

See all articles by Xiaoxiao Tang

Xiaoxiao Tang

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Date Written: January 9, 2019

Abstract

I propose a forward-looking measure of the asymmetry in the variance of asset returns and introduce a way to estimate it from option prices. This measure is model free and it serves as a close approximation for the asset expected excess return. I provide an empirically supported sufficient condition under which the risk-neutral variance asymmetry ranks stocks based on their physical expected returns. Empirically, I find strong cross-sectional correlation between this measure and future stock returns. Variance asymmetry managed portfolios yield economically large average returns and Sharpe ratios. Crash risk and standard asset pricing factors do not explain this abnormal performance.

Suggested Citation

Tang, Xiaoxiao, Variance Asymmetry Managed Portfolios (January 9, 2019). Available at SSRN: https://ssrn.com/abstract=3108007 or http://dx.doi.org/10.2139/ssrn.3108007

Xiaoxiao Tang (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

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