Asymmetric Volatility Risk: Evidence from Option Markets

We show how to extract the expected risk-neutral correlation between risk-neutral distributions of the market index (S&P 500) return and its expected volatility (VIX). Comparing the implied correlation with its realized counterpart reveals a significant index-to-volatility correlation risk premium. It compensates for the fear of enduring negative market returns and measures a new dimension of conditional risk not covered by other variables such...