Does the Volatility of Volatility Risk Forecast Future Stock Returns?

Bu, R ORCID: 0000-0002-3947-3038, Fu, X ORCID: 0000-0003-4254-6493 and Jawadi, F (2019) Does the Volatility of Volatility Risk Forecast Future Stock Returns? Journal of International Financial Markets, Institutions and Money, 61. pp. 16-36.

Text Bu et al. (2019) Does VOV Risk Forecast Future Stock Returns (Manuscript).pdf - Author Accepted Manuscript Download (549kB)

Abstract

This study investigates whether the forward-looking volatility of aggregate volatility (VOV) risk forecasts future stock returns in the US equity market. We find that stocks with higher sensitivities to changes in VOV constructed from VIX options have higher future returns than those with lower sensitivities. In particular, VOV constructed from deep out-of-the-money put options has the strongest predictive power, and the strongest predictability of VOV betas is found for investment horizons between 10-day to 1-month. Our findings are robust after considering estimation uncertainty of VOV betas and controlling for common pricing factors.

Item Type:	Article
Uncontrolled Keywords:	Stock return predictability, VIX options, Volatility of volatility, CBOE VVIX, Corridor VVIX
Depositing User:	Symplectic Admin
Date Deposited:	18 Feb 2019 09:41
Last Modified:	19 Jan 2023 01:03
DOI:	10.1016/j.intfin.2019.02.001
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3032993