Volatility-of-Volatility Risk in Asset Pricing

74 Pages Posted: 27 Feb 2021

See all articles by Te-Feng Chen

Te-Feng Chen

Hong Kong Polytechnic University

Tarun Chordia

Emory University - Department of Finance

San-Lin Chung

National Taiwan University - Department of Finance

Ji-Chai Lin

Hong Kong PolyU

Date Written: December 16, 2020

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. The market risk and volatility risk 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 for compensation for VOV risk strengthens.

Keywords: Volatility-of-Volatility, Volatility Risk, Conditional Asset Pricing Model, Market Crashes

JEL Classification: G11, G12, G13

Suggested Citation

Chen, Te-Feng and Chordia, Tarun and Chung, San-Lin and Lin, Ji-Chai, Volatility-of-Volatility Risk in Asset Pricing (December 16, 2020). Available at SSRN: https://ssrn.com/abstract=3755915 or http://dx.doi.org/10.2139/ssrn.3755915

Te-Feng Chen (Contact Author)

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong
+852 3400 3856 (Phone)

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

San-Lin Chung

National Taiwan University - Department of Finance ( email )

Taipei, 106
Taiwan
886-2-33661084 (Phone)
886-2-23660764 (Fax)

HOME PAGE: http://www.fin.ntu.edu.tw/~slchung/

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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