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The Volatility-of-Volatility Term Structure

80 Pages Posted: 8 Jun 2017 Last revised: 21 Oct 2017

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: October 19, 2017

Abstract

This paper investigates the volatility-of-volatility (VVIX) term structure. The term structure is in nearly all cases downward sloping. We find that the slope of the VVIX (SlopeVVIX), defined as VVIX' second principal component, predicts excess returns of S\&P500 and VIX straddles. Its informational content is incremental to the VIX term structure and to the variance risk premium. To analyze which type of risk is captured by SlopeVVIX, we develop an affine approximation for the VVIX based on a VIX option pricing model. We find that the contributions of continuous vol-of-vol and jump risk to the term structure 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. As its relative contribution is similarly high across all maturities at these times, our results suggest that investors expected a prolonged period of high uncertainty in volatility.

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 (October 19, 2017). Available at SSRN: https://ssrn.com/abstract=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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