Abstract
We provide an entropy measure of asymmetric comovements between an asset return and the market return. This measure yields a model-free test for stock returns asymmetry, generalizing the correlation-based test proposed by Hong, Tu, and Zhou (2007). Based on this test, we find that asymmetry is much more pervasive than previously thought. Moreover, in the cross section of stock returns, we find an asymmetry risk premium: The higher a stock's downside asymmetric comovement with the market, the higher the expected return. Our findings are consistent with the theoretical implications of a representative agent model with disappointment aversion preferences.
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