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 risk premium. I provide an empirically supported sufficient condition under which the risk-neutral variance asymmetry ranks stocks based on their 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. Furthermore, the term structure of this measure reflects future time variation in stock returns.

Committee Chair

Ohad Kadan

Committee Members

Guofu Zhou, Asaf Manela, Ngoc-Khanh Tran, John Nachbar,

Comments

Permanent URL: https://doi.org/10.7936/K7RN379P

Degree

Doctor of Philosophy (PhD)

Author's Department

Business Administration

Author's School

Graduate School of Arts and Sciences

Document Type

Dissertation

Date of Award

Spring 5-15-2018

Language

English (en)

Download

Available for download on Sunday, May 15, 2118

Included in

Business Commons

Share

COinS