The Volatility-of-Volatility Term Structure
80 Pages Posted: 8 Jun 2017 Last revised: 9 Jan 2018
Date Written: January 9, 2018
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
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