Volatility-of-Volatility Risk in Asset Pricing

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

Research output: Journal article publicationJournal articleAcademic researchpeer-review

3 Citations (Scopus)

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. (JEL G11, G12, G13)

Original languageEnglish
Pages (from-to)289-335
Number of pages47
JournalReview of Asset Pricing Studies
Volume12
Issue number1
DOIs
Publication statusPublished - 1 Mar 2022

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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