New study reveals hidden risks impacting market returns and future payoffs
Market volatility of volatility is a significant risk factor that affects index and volatility index option returns. The VIX and VVIX indices, measuring volatility and volatility of volatility, are weakly related. Strategies more exposed to these risks have more negative returns. Future option payoffs are negatively predicted by volatility and volatility of volatility. These risks are jointly priced and have negative market prices of risk.