Volatility-of-Volatility Risk

65 Pages Posted: 19 Sep 2014 Last revised: 19 Feb 2018

See all articles by Darien Huang

Darien Huang

Cornell University - Department of Finance

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Ivan Shaliastovich

University of Wisconsin - Madison

Julian Thimme

Karlsruhe Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2018

Abstract

We show that time-varying volatility of volatility is a significant risk factor which affects the cross-section and the time-series of index and VIX option returns, beyond volatility risk itself. Volatility and volatility-of-volatility measures, identified model-free from options data as the VIX and VVIX indices, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average, and more negative for strategies more exposed to volatility and volatility-of-volatility risks. Volatility and volatility of volatility significantly and negatively predict future delta-hedged option payoffs. The evidence is consistent with a no-arbitrage model featuring time-varying volatility and volatility-of-volatility factors, which are negatively priced by investors.

Keywords: volatility, volatility of volatility, VIX, VVIX, options

JEL Classification: G12, G13, G17

Suggested Citation

Huang, Darien and Schlag, Christian and Shaliastovich, Ivan and Thimme, Julian, Volatility-of-Volatility Risk (February 14, 2018). Available at SSRN: https://ssrn.com/abstract=2497759 or http://dx.doi.org/10.2139/ssrn.2497759

Darien Huang

Cornell University - Department of Finance ( email )

Ithaca, NY 14853-4201
United States

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Ivan Shaliastovich (Contact Author)

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Julian Thimme

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

HOME PAGE: http://julianthimme.de

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