DR. SILVIA MUZZIOLI,
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, we exploit the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, in the sense that investors like positive spikes while they dislike negative spikes in returns. The risk-asymmetry index is meant to capture the investors’ pricing asymmetry towards upside gains and downside losses. We 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, when it reaches very high values, it possesses the ability to signify a clearly risky situation for the aggregate stock market, detected neither by the volatility index nor by the skewness index. To our knowledge, this is the first paper proposing a synthetic risk index, based on model-free moments, which accounts both for the second and the third moments of the risk neutral distribution
