How aggregate volatility-of-volatility affects stock returns

Hollstein, F. and Prokopczuk, M. (2018) How aggregate volatility-of-volatility affects stock returns. The Review of Asset Pricing Studies, 8 (2). pp. 253-292. ISSN 2045-9939 doi: 10.1093/rapstu/rax019

Abstract/Summary

A stylized theoretical model with stochastic volatility suggests the existence of a trade-off between returns and volatility-of-volatility. Using the VVIX, a measure of the option-implied volatility of the volatility index, we confirm this prediction and detect that time-varying aggregate volatility-of-volatility commands an economically substantial and statistically significant negative risk premium. We find that a two-standard-deviation increase in aggregate volatility-of-volatility factor loadings is associated with a decrease in average annual returns of about 11%. These results are robust to controlling for aggregate volatility, jump risk, and several other characteristics and factor sensitivities, as well as various additional tests.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/75564
Identification Number/DOI	10.1093/rapstu/rax019
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Society for Financial Studies
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