The Volatility-of-Volatility Term Structure

80 Pages Posted: 8 Jun 2017 Last revised: 9 Jan 2018

Nicole Branger

University of Muenster - Finance Center Muenster

Hendrik Hülsbusch

University of Muenster - Finance Center Muenster

Alexander Kraftschik

University of Muenster - Finance Center Muenster

Date Written: January 9, 2018

Abstract

This paper studies the volatility-of-volatility (VVIX) term structure. We find that the slope of the VVIX, defined as VVIX' second principal component, predicts excess returns of S&P500 and VIX traddles. Its informational content is incremental to the VIX term structure and the variance risk premium. Thus, vol-of-vol risk matters even for stock index options. A model-based approximation for the VVIX shows that the main drivers of its term structure are continuous vol-of-vol and jump risk. Their contributions vary systematically with the state of the economy. When the latest major crises hit, continuous vol-of-vol took the lion's share over all maturities.

Keywords: Financial Crises, Option Returns, Term Structure, Volatility, Volatility-of-Volatility, VVIX

JEL Classification: C13, G01, G12, G13, G17

Suggested Citation

Branger, Nicole and Hülsbusch, Hendrik and Kraftschik, Alexander, The Volatility-of-Volatility Term Structure (January 9, 2018). Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2980074 or http://dx.doi.org/10.2139/ssrn.2980074

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Hendrik Hülsbusch (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Schlossplatz 2
Muenster
Germany

Alexander Kraftschik

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=3737

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