Volatility-of-volatility risk in the crude oil market

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.