Asymmetric Volatility Phenomenon - AVP

AAA

DEFINITION of 'Asymmetric Volatility Phenomenon - AVP'

The asymmetric volatility phenomenon (sometimes known as AVP) is a market dynamic that shows that there are higher market volatility levels in market downswings than in market upswings. Factors that cause this phenomenon have been attributed to several possible sources, such as the effects of leverage in the markets, volatility feedback and psychological investment factors related to the perceived risk/reward balance at different market levels.

INVESTOPEDIA EXPLAINS 'Asymmetric Volatility Phenomenon - AVP'

The existence of asymmetric volatility has been widely studied and confirmed, although no consensus exists as to the price drivers of the phenomenon. Its presence plays an important role in risk management and hedging strategies as well as options pricing. One of the difficult factors in identifying the causes of asymmetric volatility is separating out market-wide (systematic) factors from stock-specific (idiosyncratic) factors.

RELATED TERMS
  1. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  2. Idiosyncratic Risk

    Risk that is specific to an asset or a small group of assets. ...
  3. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  4. Correlation

    In the world of finance, a statistical measure of how two securities ...
  5. Risk/Reward Ratio

    A ratio used by many investors to compare the expected returns ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
RELATED FAQS
  1. What techniques are most useful for hedging exposure to the banking sector?

    The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >>
  2. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  3. During what stage of the economic cycle should I invest in the drugs sector?

    Invest in the drugs sector during the expansionary stage of the economic cycle, when the broader market is rising. The absolute ... Read Full Answer >>
  4. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  5. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
  6. What options strategies are best suited for investing in the aerospace sector?

    The best options strategies for investing in the aerospace sector exploit the sector's volatility and propensity for big ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Where's The Market Headed Now?

    Whether up, down or sideways, learn about some of the factors that drive stock market moves.
  2. Investing Basics

    Investing During Uncertainty

    The inability to forecast future events can turn the markets upside down. Find out how to stay right-side up.
  3. Mutual Funds & ETFs

    Understanding Volatility Measurements

    How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more!
  4. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  5. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  6. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  7. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  8. Mutual Funds & ETFs

    U.S. Investors Are Seeking Opportunities Overseas

    A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended.
  9. Investing

    Three Portfolio Moves To Consider Now

    What portfolio moves should you consider making as the 2nd quarter kicks off? Before we focus on the future, let’s first reflect on the 1st Q surprises.
  10. Investing Basics

    Manage Investments And Modern Portfolio Theory

    Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ...

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center