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http://ssrn.com/abstract=2023066
 
 

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Unknown Unknowns: Vol-of-Vol and the Cross-Section of Stock Returns


Guido Baltussen


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Sjoerd Van Bekkum


Erasmus University Rotterdam - Finance Group; Tinbergen Institute

Bart Van der Grient


Robeco Asset Management - Quantitative Strategies

March 6, 2013

AFA 2013 San Diego Meetings Paper

Abstract:     
We develop a measure for uncertainty about expected stock returns that is derived directly from the well-developed literature on second-order utility: the volatility of option-implied volatility (vol-of-vol). High vol-of-vol stocks signal more of such uncertainty, and robustly underperform low vol-of-vol stocks by 10 percent per year. The vol-of-vol effect is not driven by optimism bias or arbitrage frictions, exposures to jump risk or stochastic volatility risk, or by higher-order risk. Moreover, statistical tests cannot confirm that vol-of-vol is a priced risk factor in traditional asset pricing models. Our results seem inconsistent with rational pricing of uncertainty by a representative agent.

Number of Pages in PDF File: 69

Keywords: asset pricing, stock returns, uncertainty

JEL Classification: G10, G12, D80

working papers series


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Date posted: March 20, 2012 ; Last revised: March 15, 2013

Suggested Citation

Baltussen, Guido and van Bekkum, Sjoerd and van der Grient, Bart, Unknown Unknowns: Vol-of-Vol and the Cross-Section of Stock Returns (March 6, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2023066 or http://dx.doi.org/10.2139/ssrn.2023066

Contact Information

Guido Baltussen
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
Sjoerd Van Bekkum (Contact Author)
Erasmus University Rotterdam - Finance Group ( email )
P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands
Tinbergen Institute ( email )
P.O. Box 1738
Rotterdam
Netherlands
Bart Van der Grient
Robeco Asset Management - Quantitative Strategies ( email )
P.O. Box 973
3000 AZ Rotterdam
Netherlands
HOME PAGE: http://www.robeco.com
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