Asymmetry-Risk and Stochastic Dominance Asset Pricing

70 Pages Posted: 19 Aug 2019 Last revised: 29 Jun 2020

See all articles by Victor Chow

Victor Chow

West Virginia University - Department of Finance

Ben J. Sopranzetti

Rutgers Business School: Newark and New Brunswick

Zhan Wang

Research Center of Finance, Shanghai Business School

Date Written: May 15, 2020

Abstract

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.

Suggested Citation

Chow, Victor and Sopranzetti, Ben J. and Wang, Zhan, Asymmetry-Risk and Stochastic Dominance Asset Pricing (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3437440 or http://dx.doi.org/10.2139/ssrn.3437440

Victor Chow (Contact Author)

West Virginia University - Department of Finance ( email )

P. O. Box 6025
Morgantown, WV 26506
United States

Ben J. Sopranzetti

Rutgers Business School: Newark and New Brunswick ( email )

100 Rockafeller Rd
Piscataway, NJ 08854
United States

Zhan Wang

Research Center of Finance, Shanghai Business School ( email )

2271 West Zhong Shan Road
Shanghai, Shanghai 200235
China

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