Abstract
I propose a forward-looking measure of the asymmetry in the variance of asset returns and introduce a way to estimate it from option prices. This measure is model free and it serves as a close approximation for the asset expected excess return. I provide an empirically supported sufficient condition under which the risk-neutral variance asymmetry ranks stocks based on their physical expected returns. Empirically, I find strong cross-sectional correlation between this measure and future stock returns. Variance asymmetry managed portfolios yield economically large average returns and Sharpe ratios. Crash risk and standard asset pricing factors do not explain this abnormal performance.
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