Does the volatility of volatility risk forecast future stock returns?

This study investigates whether the forward-looking volatility of aggregate volatility (VOV) risk forecasts future stock returns in the US equity market. We find that stocks with higher sensitivities to changes in VOV constructed from VIX options have higher future returns than those with lower sensitivities. In particular, VOV constructed from deep out-of-the-money put options has the strongest predictive power, and the strongest predictability of VOV betas is found for investment horizons between 10-day to 1-month. Our findings are robust after considering estimation uncertainty of VOV betas and controlling for common pricing factors. (C) 2019 Elsevier B.V. All rights reserved.