Volatility-of-Volatility Risk
2018 ◽
Vol 54
(6)
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pp. 2423-2452
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Keyword(s):
We show that market volatility of volatility is a significant risk factor that affects index and volatility index option returns, beyond volatility itself. The volatility and volatility of volatility indices, identified model-free as the VIX and VVIX, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average and are more negative for strategies that are more exposed to volatility and volatility-of-volatility risks. Further, volatility and volatility of volatility significantly negatively predict future delta-hedged option payoffs. The evidence suggests that volatility and volatility-of-volatility risks are jointly priced and have negative market prices of risk.
Keyword(s):
2021 ◽
Vol 77
(18)
◽
pp. 446
2020 ◽
Vol 28
(23)
◽
pp. 996-1002
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Keyword(s):
2015 ◽
Vol 42
(S1)
◽
pp. S11-S11
◽