Vol of Vol

I was at this year's OptionMetrics conference and it was a nice overview of 13 different papers. One that stood out was Guido Boltussen's paper (coauthored by Van Bekkum and Van Der Grient of Erasmus U) on Unknown Unknowns: Vol-of-Vol and the Cross Section of Returns. The idea was simple. Instead of sorting by vol, they sorted by vol of vol, and generate a rather large annualized return  difference (10%) between the high vs. low vol-of-vol buckets. It's a bit like the guys at Gillette coming out with 5 blades, applied to volatility. Here's the standard graph with monthly excess returns:

In any case, it's intriguing. I haven't looked too hard at this, but it's a pretty obvious extension of the well-known low vol premium, and plan to investigate further. Clearly vol-of-vol is correlated with vol, so it would be interesting to see how these variables relate to each other in explaining the now well-known low-volatility premium. Perhaps volatility is a poor man's estimate of the 'true' factor, vol-of-vol, or vol-of-vol-of-vol.

There were several interesting papers, and I noticed that as usual, the risk premium (aka 'price of risk) was usually negative. Now, the risk premium should be positive, a premium, but empirically is usually negative; I don't think that word doesn't means what they think it means. I think it's better to say, here are excess returns, controlling for various obvious alternative characteristics we know to be correlated with excess returns. 

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