Date of Award
Master of Science (MS)
Tyler J. Brough
Finance theory suggests that there is a direct positive relationship between a stock's return and that same stock's risk. Similarly, a common variable used as an attempt to quantify that risk is volatility. However, volatility almost certainly falls short of accounting for all the relevant risks that investors face. I hypothesize in this paper that the added volatility of volatility measure may help in the explanation of a stock's subsequent returns. I estimate volatility of volatility (vol of vol) by imposing a structural model on the data and then subsequently estimating the vol of vol parameter. My results show that this structural parameter estimate is unable to explain any of the subsequent (or current) stock returns, and thus fails to provide any evidence to support my hypothesis. I subsequently use a more simple estimate for the vol of vol and find that it is almost perfectly correlated with plain vanilla volatility which does instead have a signicant relationship with returns.
Alfen, Tyson Van, "Volatility of Volatility Structural Parameter Estimation and Subsequent Cross-Sectional Returns" (2013). All Graduate Plan B and other Reports. Paper 302.
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