Volatility-of-Volatility Risk in the Crude Oil Market

33 Pages Posted: 31 Jul 2019 Last revised: 17 Aug 2019

See all articles by Tai-Yong Roh

Tai-Yong Roh

Liaoning University

Yahua Xu

Central University of Finance and Economics (CUFE) - China Economics and Management Academy

Date Written: July 27, 2019

Abstract

Under the stochastic volatility-of-volatility framework, we show that oil volatility-of-volatility risk is a significant pricing factor for cross-sectional delta-hedged gains constructed from 1-month United States Oil Fund (USO) options, and is negatively priced. Moreover, oil volatility-of-volatility risk can significantly and negatively predict one-period ahead delta-hedged option gains. The findings are robust after implementing several tests such as controlling for jump risk measures, another measure of oil volatility-of-volatility and delta-hedged gains constructed from 1-week USO options. The information content of oil volatility-of-volatility is also distinctive from its equity counterpart, which can contribute to predicting the future real personal consumption expenditure.

Keywords: Crude oil market; Stochastic volatility-of-volatility risk; Delta-hedged gains; Jump risks; Pricing implications

JEL Classification: G1; C5; Q3; Q4

Suggested Citation

Roh, Tai-Yong and Xu, Yahua, Volatility-of-Volatility Risk in the Crude Oil Market (July 27, 2019). Available at SSRN: https://ssrn.com/abstract=3427701 or http://dx.doi.org/10.2139/ssrn.3427701

Tai-Yong Roh

Liaoning University ( email )

Shenyang, Liaoning
China

Yahua Xu (Contact Author)

Central University of Finance and Economics (CUFE) - China Economics and Management Academy ( email )

NO.39 South College Road
Haidian District
Beijing, 100081
China

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