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Volatility‐of‐volatility risk in the crude oil market

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  • Tai‐Yong Roh
  • Alireza Tourani‐Rad
  • Yahua Xu
  • Yang Zhao

Abstract

This paper examines the role of oil volatility‐of‐volatility (VOV) risk under a stochastic VOV framework. We show that oil VOV is a significant pricing factor in the cross‐sectional delta‐hedged gains constructed from oil options, and oil VOV also has predictive power for near‐term delta‐hedged option gains. Moreover, we show that the information contained in oil VOV is highly specific compared to its equity counterpart and other volatility‐related measures, from the perspective of its predictability of future economic conditions. Our findings are robust to alternative VOV risk measures and forecasting horizons.

Suggested Citation

  • Tai‐Yong Roh & Alireza Tourani‐Rad & Yahua Xu & Yang Zhao, 2021. "Volatility‐of‐volatility risk in the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(2), pages 245-265, February.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:2:p:245-265
    DOI: 10.1002/fut.22166
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    6. Li, Chenchen & Wang, Yudong & Wu, Chongfeng, 2022. "Oil implied volatility and expected stock returns along the worldwide supply chain," Energy Economics, Elsevier, vol. 114(C).
    7. Yanqiong Liu & Zhenghui Li & Yanyan Yao & Hao Dong, 2021. "Asymmetry of Risk Evolution in Crude Oil Market: From the Perspective of Dual Attributes of Oil," Energies, MDPI, vol. 14(13), pages 1-22, July.
    8. Wang, Kangsheng & Wen, Fenghua & Gong, Xu, 2024. "Oil prices and systemic financial risk: A complex network analysis," Energy, Elsevier, vol. 293(C).
    9. Zhang, Zongyi & Fan, Zhenjun, 2024. "Oil price uncertainty and corporate diversification: Evidence from Chinese manufacturing firms," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 929-947.
    10. Dąbrowski, Marek A. & Papież, Monika & Rubaszek, Michał & Śmiech, Sławomir, 2022. "The role of economic development for the effect of oil market shocks on oil-exporting countries. Evidence from the interacted panel VAR model," Energy Economics, Elsevier, vol. 110(C).

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