Assessing asymmetry risk premium in U.S. stock markets

This study examines the relationship between stock asymmetry and future returns in the U.S. equity market, comparing a new density function-based asymmetry metric with traditional skewness measures. Traditional skewness metrics have yielded unclear characterizations of the relationship between individual stock return asymmetry (RA) and future returns. Moreover, despite existing claims that idiosyncratic asymmetric risk is not priced in U.S. stocks. Using U.S. equity market data, we measured individual stock idiosyncratic asymmetry with both the new density function-based metric and traditional skewness (ISKEW). We formed portfolios based on asymmetry levels and tested differences in future returns across portfolios, while controlling for firm characteristics and incorporating moderating factors. The density function-based asymmetry metric showed a significantly negative correlation with future average returns of U.S. stocks, consistent with recent theoretical deductions. Traditional skewness metrics produced significantly weaker relationships. The return differences across asymmetry-sorted portfolios were economically and statistically significant, even after controlling for firm characteristics and when accounting for moderating factors like volatility, investor sentiment, market liquidity, and arbitrage trading.