Volatility-of-Volatility Risk in Asset Pricing

Te Feng Chen; Tarun Chordia; San Lin Chung; Ji Chai Lin

doi:10.1093/rapstu/raab018

Volatility-of-Volatility Risk in Asset Pricing

Te Feng Chen^*, Tarun Chordia, San Lin Chung, Ji Chai Lin

^*Corresponding author for this work

Research output: Contribution to journal › Journal Article › peer-review

7 Scopus citations

Abstract

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.

Original language	English
Pages (from-to)	289-335
Number of pages	47
Journal	Review of Asset Pricing Studies
Volume	12
Issue number	1
DOIs	https://doi.org/10.1093/rapstu/raab018
State	Published - 01 03 2022
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2021 The Author(s) 2021. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: [email protected].

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abstract = "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.",

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AU - Chen, Te Feng

AU - Chordia, Tarun

AU - Chung, San Lin

AU - Lin, Ji Chai

N1 - Publisher Copyright: © 2021 The Author(s) 2021. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: [email protected].

PY - 2022/3/1

Y1 - 2022/3/1

N2 - 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.

AB - 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.

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DO - 10.1093/rapstu/raab018

M3 - 文章

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EP - 335

JO - Review of Asset Pricing Studies

JF - Review of Asset Pricing Studies

IS - 1

ER -

Volatility-of-Volatility Risk in Asset Pricing

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