Asymmetry-Risk and Stochastic Dominance Asset Pricing
70 Pages Posted: 19 Aug 2019 Last revised: 29 Jun 2020
Date Written: May 15, 2020
Based on a novel measure of volatility-asymmetries in asset returns, we provide economic insight into the asymmetry-risk as a critical factor for investment decision making. Our approach offers a distribution-free solution to determine the portfolio efficient-frontier under stochastic dominance. It yields a utility-free portfolio separation for investors who are not only averse to symmetric risk and but also possess a diminishing risk-tolerance for asymmetric payoffs of gain/loss. In equilibrium, thus, investors require additional compensation for bearing the systematic risk associated with market volatility-asymmetries. Our model extends CAPM and rationalizes both the equity-premium and beta-anomaly puzzle.
Keywords: Volatility Asymmetry, Stochastic Dominance, Asset Pricing, CAPM
JEL Classification: D81, G02, G11, G12.
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