The Volatility-of-Volatility Term Structure

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: 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