Asymmetric Effects of Volatility Risk on Stock Returns: Evidence from VIX and VIX Futures

To capture volatility risk, we use factors from VIX, VIX futures, and their basis. We find that portfolios with lower (higher) factor loadings on the market and volatility risk from in-sample time-series regressions, have persistent out-of-sample lower (higher) factor loadings. More importantly, by separating cases based on the sign of volatility changes, this study documents the existence of an asymmetric effect due to volatility shocks on asset returns. When volatility is shocked positively, there is a significantly negative relationship between factors associated with uncertainty and asset returns. Furthermore, after incorporating this asymmetric effect, volatility factors have significant risk premia in Fama-MacBeth crosssectional regressions