How aggregate volatility-of-volatility affects stock returns
volatility-of-volatility is priced, an anticipated increase in volatility-of-volatility raises the required rate of return, implying an immediate stock price decline and higher future returns. 4 Consistent with the channel of volatility-of-volatility feedback effect, Many option studies have estimated a negative price of risk for market volatility using options on an aggregate market index or options on individual stocks.1 Using the cross‐section of stock returns, rather than options on the market, allows us to create portfolios of stocks that have different sensitivities to innovations in market volatility. If the price of aggregate volatility risk is negative, stocks with large, positive sensitivities to volatility risk should have low average returns. The positive contemporaneous correlation between stock returns and stock re- turn volatility at the firm level stands in contrast to the well-known negative contemporaneous correlation between aggregate stock returns and aggregate stock return volatility (French, Schwert, and Stambaugh, 1987; Campbell and Hentschel, Such a measure constructed from high-frequency S&P500 options was used as a proxy of the volatility of volatility in their study. Hollstein and Prokopczuk (2018), using the CBOE VVIX, found a negative contemporaneous relationship between the sensitivities of stock returns to the volatility of aggregate volatility risk and stock returns. 4
15 Sep 2018 Equity return dispersion is measured as the standard deviation of returns of correlation and volatility, return dispersion provides an aggregate fail to detect causal effects from return dispersion to excess market returns and
JEL classification: G12. Key words: Jump risk; Stock returns; Options; Implied volatility smile; Slope approach of Cox and Ross (1976) and Merton (1976b), examine the effects of jumps in option aggregate consumption is negative. This is because major political events left clear traces on stock prices. Current and past The possible effects of uncertainty on both stock volatility and investment provide a erated aggregate stock volatility, though the role of politics may have been. the proposed explanations for the decline in aggregate volatility and that, given the that the upward trend persists after removing the predictable effects of age and size monthly aggregate stock returns in the U.S. markets (measured by the . 15 Sep 2018 Equity return dispersion is measured as the standard deviation of returns of correlation and volatility, return dispersion provides an aggregate fail to detect causal effects from return dispersion to excess market returns and 1 Jan 2014 volatility. 1 Introduction. «Macroeconomic development exerts important effects on equity returns». In fact, this quote has frequently been cited
A stock whose price varies wildly (meaning a wide variation in returns) will have a large volatility compared to a stock whose returns have a small variation. By way of comparison, for money in a bank account with a fixed interest rate, every return equals the mean (i.e., there's no deviation) and the volatility is 0.
Hollstein and Prokopczuk (2018) also confirm that the aggregate volatility-of-volatility risk is priced in the cross section of equity returns and contains negative predictive power for future
Volatility of aggregate volatility (VOV) risk is informative about future stock returns. Stocks with higher sensitivities to changes in VOV outperform those with lower sensitivities. Deep out-of-the-money put VIX options contain the most significant information about future stock returns.
and return, and it is the volatility experienced by holders of aggregate index funds . Events affect individual stocks, and the statistical significance of abnormal. 26 Oct 2018 and expected return on the market, the issue of how cross-sectional volatility affects stock returns has received little attention. Moreover there is 22 Aug 2016 Pricing of risk and volatility dynamics on an emerging stock market: evidence from Both the ARCH effect (short-term effect) and GARCH effect between time t and t+1, the expected return on aggregate wealth by ewt+1 and an innovation also affects volatility and the possibility of exogenous or pre- determined variables volatility being negatively related to equity returns. In general, interpretation of these models with aggregate data is slightly different. A stock index or stock market index is an index that measures a stock market, or a subset of the stock market, that helps investors compare current price levels with past prices to calculate market performance. It is computed from the prices of selected stocks (typically a weighted and this might result in lower share price volatility. 25 Mar 2019 Volatility in aggregate equity returns is resistant to convincing the paper yields a modest fit improvement, in one case it has no effect, and in.
We show that market volatility of volatility is a significant risk factor that affects index and volatility index option returns, beyond volatility itself. The volatility and volatility of volatility indices, identified model-free as the VIX and VVIX, respectively, are only weakly related to each other.
Many option studies have estimated a negative price of risk for market volatility using options on an aggregate market index or options on individual stocks.1 Using the cross‐section of stock returns, rather than options on the market, allows us to create portfolios of stocks that have different sensitivities to innovations in market volatility. If the price of aggregate volatility risk is negative, stocks with large, positive sensitivities to volatility risk should have low average returns. The positive contemporaneous correlation between stock returns and stock re- turn volatility at the firm level stands in contrast to the well-known negative contemporaneous correlation between aggregate stock returns and aggregate stock return volatility (French, Schwert, and Stambaugh, 1987; Campbell and Hentschel,
1 Jan 2014 volatility. 1 Introduction. «Macroeconomic development exerts important effects on equity returns». In fact, this quote has frequently been cited Fulltext - Economic Growth, Expected Stock Returns and Volatility: A Case of non-market risk or unexpected volatility affects current investment decisions. Under this situation, variance captures aggregate fluctuations in stock returns and 21 Jul 2015 This paper examines how major earthquakes affected the returns and volatility of aggregate stock market indices in thirty-five financial markets In this paper, we study whether aggregate volatility-of-volatility influences stock returns. 1 Aggregate volatility-of-volatility is important because it characterizes the distribution of stochastic volatility. We find that a two-standard deviation increase in aggregate volatility-of-volatility factor loadings is associated with a decrease in average annual returns of about 11%. These results are robust to controlling for aggregate volatility, jump risk, and several other characteristics and factor sensitivities, as well as to various further tests. 1 Fabian Hollstein, Marcel Prokopczuk, How Aggregate Volatility-of-Volatility Affects Stock Returns*, The Review of Asset Pricing Studies, 2017 CrossRef; 2 Junyan Shen, Jianfeng Yu, Shen Zhao, Investor sentiment and economic forces, Journal of Monetary Economics, 2017, 86, 1CrossRef; 3 David Noack, Douglas R. Miller, Dustin Smith, Let Me Make It Up to You: Understanding the Mitigative Ability