Volatility-of-volatility and the cross-section of option returns

This paper presents a robust new finding of a significant negative relation between equity option returns and the volatility-of-volatility (VOV). After controlling for numerous existing option and stock characteristics, the VOV effect remains significantly negative. It also survives many robustness checks. A conceptual model provided reveals the pricing mechanism behind the VOV effect. The high-low return spread on option portfolios sorted on VOV cannot be explained by standard risk factors, and survives double sorting using a variety of control variables. (C) 2019 Elsevier B.V. All rights reserved.