Volatility-of-volatility and the cross-section of option returns

Xinfeng Ruan

Journal of Financial Markets, 2020, vol. 48, issue C

Abstract: This paper presents a robust new finding of a significant negative relation between equity option returns and the volatility-of-volatility (VOV). After controlling for numerous existing option and stock characteristics, the VOV effect remains significantly negative. It also survives many robustness checks. A conceptual model provided reveals the pricing mechanism behind the VOV effect. The high-low return spread on option portfolios sorted on VOV cannot be explained by standard risk factors, and survives double sorting using a variety of control variables.

Keywords: Volatility-of-volatility; Option returns; Cross-section (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:48:y:2020:i:c:s1386418118300818

DOI: 10.1016/j.finmar.2019.03.002

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