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

Authors

  • R. Jared Delisle,

    Corresponding author
    1. Department of Finance, Insurance, and Real Estate, College of Business, Washington State University, Vancouver, Washington
    • Department of Finance, Insurance, and Real Estate, College of Business, Washington State University, 14204 NE Salmon Creek Avenue, Vancouver, Washington 98686
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  • James S. Doran,

    1. Department of Finance, College of Business, Florida State University, Tallahassee, Florida
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  • David R. Peterson

    1. Department of Finance, College of Business, Florida State University, Tallahassee, Florida
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  • The authors acknowledge the helpful comments and suggestions of Robert Battalio, Charles Cao, Martijn Cremers, George Comer, David Denis, Dirk Hackbarth, John Clark Francis, Alok Kumar, Anna Obizhaeva, Ehud Ronn, Chris Stivers, Ilya Strebulaev, Anand Vijh, Keith Vorkink, David Yermack, Jialin Yu, Huimin Zhao, and the participants of the 2009 FMA meeting, the 2009 PhD Project FDSA meeting, and the 20th Anniversary Conference on Financial Economics and Accounting. All remaining errors are our own.

Abstract

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. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:34–54, 2011

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