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The Risk-Asymmetry Index as a new Measure of Risk

Multinational Finance Journal, 2018, vol. 22, no. 3/4, pp. 173-210
Elyas Elyasiani , Temple University, USA
Luca Gambarelli , University of Modena and Reggio Emilia, Italy

Abstract:
The aim of this paper is to propose a simple and unique measure of risk that subsumes the conflicting information contained in volatility and skewness indices and overcomes the limitations of these indices in accurately measuring future fear or greed in the market. To this end, the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, is exploited. The risk-asymmetry index is intended to capture the investors’ pricing asymmetry towards upside gains and downside losses. The results show that the proposed risk-asymmetry index can play a crucial role in predicting future returns, at various forecast horizons, since it subsumes the information embedded in both the volatility and skewness indices. Furthermore, the risk-asymmetry index is the only index that, at very high values, possesses the ability to clearly highlight a risky situation for the aggregate stock market.

Keywords : risk-asymmetry; corridor implied volatility; risk-neutral moments; risk measures; return predictability
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