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Asymmetric pricing of implied systematic volatility in the cross-section of expected returns

✍ Scribed by R. Jared Delisle; James S. Doran; David R. Peterson

Publisher
John Wiley and Sons
Year
2010
Tongue
English
Weight
132 KB
Volume
31
Category
Article
ISSN
0270-7314

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✦ Synopsis

Assuming a symmetric relation between returns and innovations in implied market volatility, Ang, A., Hodrick, R., Xing, Y., and Zhang, X. (2006) find that sensitivities to changes in implied market volatility have a cross-sectional effect on firm returns. Dennis, P., Mayhew, S., and Stivers, C. (2006), however, find an asymmetric relation between firm-level returns and implied market volatility innovations. We incorporate this asymmetry into the cross-sectional relation between sensitivity to volatility innovations and returns. Using both portfolio sorting and firm-level regressions, we find that sensitivity to VIX innovations is negatively related to returns when volatility is rising, but is unrelated when it is falling. The negative relation is robust to controls for other variables, suggesting only the increase in implied market volatility is a priced risk factor.

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