The Review of Asset Pricing Studies Vol. 8 No. 2 2018
How Aggregate Volatility-of-Volatility Affects Stock Returns*
Abstract
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.
- DOI
- 10.1093/rapstu/rax019
- Volume
- 8
- Issue
- 2
- Pages
- 253-292
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib