Volatility-of-Volatility Risk in Asset Pricing

Stock returns and volatility: Pricing the short-run and long-run components of market risk

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

The Review of Asset Pricing Studies, 2022, vol. 12, issue 1, 289-335

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)

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:12:y:2022:i:1:p:289-335.

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