Volatility-of-Volatility Risk in Asset Pricing

This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on VOV, are priced. The pricing impact of VOV strengthens during market crashes, suggesting that VOV is particularly relevant during market turmoil, when investors demand increased compensation for VOV risk.

Keywords: Volatility-of-Volatility, Volatility Risk, Conditional Asset Pricing Model, Market Crashes

JEL Classification: G11, G12, G13

Suggested Citation: Suggested Citation

Chen, Te-Feng and Chordia, Tarun and Chung, San-Lin and Lin, Ji-Chai, Volatility-of-Volatility Risk in Asset Pricing (June 30, 2021). Review of Asset Pricing Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3755915 or http://dx.doi.org/10.2139/ssrn.3755915