Characterizing the asymmetric dependence premium

Abstract

We examine the price of asymmetric dependence (AD) in the cross section of US equities. Using a β-invariant AD metric, we demonstrate that the return premiumfor AD is approximately 47% of the premium for β. The premium for lower-tail AD is equivalent to 26% of the market risk premium and has been relatively constant through time. The discount associated with upper-tail AD is 29% of themarket risk premium and has been increasing markedly in recent years. Our findings have substantial implications for the cost of capital, investor expectations, portfolio management, and performance assessment.