We find a positive relationship between individual stocks’ implied variance asymmetry, defined as the difference between upside and downside risk-neutral semivariances extracted from out-of-money options, and future stock returns. The high-minus-low hedge portfolio earns the excess return of 0.90% (0.67%) per month in equal-weighted (value-weighted) returns. We show that implied variance asymmetry provides a neat measure of risk-neutral skewness and outperforms the standard risk-neutral skewness in predicting the cross-section of future stock returns. Risk-based equilibrium asset pricing models can not explain such a positive relationship, which instead can be potentially explained by information asymmetry and informed trading.

We examine U.S. equity trader use of dark and lit markets. Marketable orders executed in the dark have lower information content and smaller fill rates. Dark orders take longer to execute, but they execute at more favorable prices. Traders are more likely to go dark when the bid-ask spread is wider and those with higher dark participation are more sophisticated. Although market regulators have expressed concern over the rise in dark trading, our results indicate that dark markets provide important benefits to traders that lit markets do not.

We find a strong and robust positive relationship between individual downside variance premia (DVP)–the difference between risk-neutral and physical expected downside variances–and future corporate bond returns. The spread portfolio that longs the high DVP bond portfolio and shorts the low DVP bond portfolio earns a statistically significant excess return of 0.37% (0.42%) per month in value- (equal-)weighted returns. The alpha estimates from various factor models remain statistically significant and economically substantial. The predictive power of the downside variance premium is stronger in noninvestment-grade (long-maturity) corporate bonds than in investment-grade (short-maturity) bonds. We show that the downside variance premium positively relates to the likelihood of future default and cash flow uncertainty and negatively relates to future cash flows.

This paper investigates the impact of international political risk on government bond yields in 34 debtor countries using a comprehensive database of 109 international political crises from 1988 through 2007. After employing the total number of international political crises as a proxy for political risk and controlling for country-specific economic conditions, we establish a positive and significant link between international political risk and government bond yields. This is consistent with global bond investors demanding higher returns at times of high political uncertainty. In addition, we show that international political risk has a reduced adverse effect on bond prices when the debtor country has a stable political system and strong investor protection.