Volatility of Volatility, Expected Stock Return and Variance Risk Premium

Theory suggests a relationship between both volatility of volatility, variance risk premium, and the equity risk premium. We empirically investigate the relationship between volatility of volatility and the equity risk premium, and the relationship between the variance risk premium and the equity risk premium. We find that volatility of volatility alone explains 5 to 10% of the total variation of equity risk premium, and together with VIX data, it explains more than 20% of the total variation of equity premium. We fail to find a significant relationship between volatility of volatility and the variance risk premium.We use six measures of volatility of volatility based on non-parametric models, a GARCH model and VVIX data.

Keywords: Volatility of Volatility, Variance Risk Premium, Expected Stock Return

JEL Classification: C13, G12

Suggested Citation: Suggested Citation

Wang, Ruoyang and Kirby, Chris and Clark, Steven P., Volatility of Volatility, Expected Stock Return and Variance Risk Premium (August 19, 2013). 26th Australasian Finance and Banking Conference 2013, Available at SSRN: https://ssrn.com/abstract=2312408 or http://dx.doi.org/10.2139/ssrn.2312408