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The Uncertainty of Risk - Volatility of Volatility in the Swedish Equity Market

Khanzadi, Ali LU and Elliot, Fredrik LU (2016) NEKP03 20161
Department of Economics
Abstract
In addition to market volatility, a stylized theoretical model and recent empirical findings suggests the existence of a premium for market volatility of volatility. By developing seven different measures of volatility of volatility and through the method of principal component analysis, we investigate if this aggregate uncertainty is priced in the Swedish equity market. We find no strong evidence for a volatility of volatility effect in the cross-section of stock returns. Moreover, we find no persistence in stock exposure to volatility of volatility over time. This suggests that investors are unable to distinguish high volatility of volatility from low volatility of volatility stocks and hence, they cannot adequately price the aggregate... (More)
In addition to market volatility, a stylized theoretical model and recent empirical findings suggests the existence of a premium for market volatility of volatility. By developing seven different measures of volatility of volatility and through the method of principal component analysis, we investigate if this aggregate uncertainty is priced in the Swedish equity market. We find no strong evidence for a volatility of volatility effect in the cross-section of stock returns. Moreover, we find no persistence in stock exposure to volatility of volatility over time. This suggests that investors are unable to distinguish high volatility of volatility from low volatility of volatility stocks and hence, they cannot adequately price the aggregate market uncertainty in the Swedish equity market. (Less)
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author
Khanzadi, Ali LU and Elliot, Fredrik LU
supervisor
organization
course
NEKP03 20161
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Uncertainty, Volatility of Volatility, Aggregate risk factors, ICAPM
language
English
id
8879917
date added to LUP
2016-06-13 13:13:59
date last changed
2016-06-13 13:13:59
@misc{8879917,
  abstract     = {In addition to market volatility, a stylized theoretical model and recent empirical findings suggests the existence of a premium for market volatility of volatility. By developing seven different measures of volatility of volatility and through the method of principal component analysis, we investigate if this aggregate uncertainty is priced in the Swedish equity market. We find no strong evidence for a volatility of volatility effect in the cross-section of stock returns. Moreover, we find no persistence in stock exposure to volatility of volatility over time. This suggests that investors are unable to distinguish high volatility of volatility from low volatility of volatility stocks and hence, they cannot adequately price the aggregate market uncertainty in the Swedish equity market.},
  author       = {Khanzadi, Ali and Elliot, Fredrik},
  keyword      = {Uncertainty,Volatility of Volatility,Aggregate risk factors,ICAPM},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Uncertainty of Risk - Volatility of Volatility in the Swedish Equity Market},
  year         = {2016},
}