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Volatility‐of‐volatility risk in the crude oil market

Tai‐Yong Roh, Alireza Tourani‐Rad, Yahua Xu and Yang Zhao
Authors registered in the RePEc Author Service: Alireza Tourani-Rad ()

Journal of Futures Markets, 2021, vol. 41, issue 2, 245-265

Abstract: This paper examines the role of oil volatility‐of‐volatility (VOV) risk under a stochastic VOV framework. We show that oil VOV is a significant pricing factor in the cross‐sectional delta‐hedged gains constructed from oil options, and oil VOV also has predictive power for near‐term delta‐hedged option gains. Moreover, we show that the information contained in oil VOV is highly specific compared to its equity counterpart and other volatility‐related measures, from the perspective of its predictability of future economic conditions. Our findings are robust to alternative VOV risk measures and forecasting horizons.

Date: 2021
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