Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/178991
Authors: 
Huang, Darien
Schlag, Christian
Shaliastovich, Ivan
Thimme, Julian
Year of Publication: 
2018
Series/Report no.: 
SAFE Working Paper No. 210
Abstract: 
We show that time-varying volatility of volatility is a significant risk factor which affects the cross-section and the time-series of index and VIX option returns, beyond volatility risk itself. Volatility and volatility-of-volatility measures, identified modelfree from the option price data as the VIX and VVIX indices, respectively, are only weakly related to each other. Delta-hedged index and VIX option returns are negative on average, and are more negative for strategies which are more exposed to volatility and volatility-of-volatility risks. Volatility and volatility of volatility significantly and negatively predict future delta-hedged option payoffs. The evidence is consistent with a no-arbitrage model featuring time-varying market volatility and volatility-of-volatility factors, both of which have negative market price of risk.
Subjects: 
volatility of volatility
hedging errors
risk premiums
JEL: 
G12
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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