The objectives of this study are fourfold. First, to outline, for the first time, a skewness index for each of the 12 European countries considered. The use of a country-specific measure is a way to deal with the limited availability of option-based data, which is the main obstacle for the construction of such indices in Europe. Second, to compute an alternative risk-asymmetry measure (RAX) based on corridor implied volatilities in order to determine whether it outperforms the standard skewness index in measuring tail risk. Third, to investigate the properties of our proposed index by casting light on the information content of skewness about future returns, which is the subject of intense debate in the literature. Finally, to propose two aggregate indices of asymmetry to monitor the risk of the European financial markets. We obtain several results potentially of interest to both investors and policy-makers. First, risk-neutral distribution is generally left-skewed for the markets under investigation. Second, the risk-neutral distribution for the 60-day maturity is, in general, more skewed to the left than the 30-day risk-neutral distribution, indicating that investors fear tail risk in the medium term to a greater extent than in the short term. Third, for most countries, very low values of the asymmetry indices are associated with positive future returns on the underlying market. Finally, the aggregate asymmetry index based on the RAX methodology is the only one able to forecast future negative returns for all the EU countries in our dataset when it reaches very high levels.

The aim of this paper is to propose a simple and unique measure of risk that subsumes the conflicting information contained in volatility and skewness indices and overcomes the limitations of these indices in accurately measuring future fear or greed in the market. To this end, the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, is exploited. The risk-asymmetry index is intended to capture the investors’ pricing asymmetry towards upside gains and downside losses. The results show that the proposed risk-asymmetry index can play a crucial role in predicting future returns, at various forecast horizons, since it subsumes the information embedded in both the volatility and skewness indices. Furthermore, the risk-asymmetry index is the only index that, at very high values, possesses the ability to clearly highlight a risky situation for the aggregate stock market.