Predicting market crashes: Volatility-of-volatility impacts tail risk hedging returns
The study found that when the volatility-of-volatility increases, the prices of certain options go up and their future returns go down. This effect lasts for about three to four weeks. This predictability is not affected by other factors like jump risk or option liquidity. The reason for this could be either a higher risk of a crash happening or uncertainty about future volatility.