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

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14 Citations (Scopus)

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.

Original languageEnglish
Article number100492
JournalJournal of Financial Markets
Volume48
DOIs
Publication statusPublished - Mar 2020
Externally publishedYes

Keywords

  • Cross-section
  • Option returns
  • Volatility-of-volatility

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