Nature of VIX Jumps on Market Timing of Hedge Funds

Abstract:     
The study indicates that Brownian motion, finite and infinite activity jumps are present in the ultra-high frequency VIX data. The total quadratic variation can be split into a continuous component of 29% and a jump component of 71%. Jump activities on ultra-high frequency VIX data are found informative in ex-ante identifying subgroups of hedge funds that deliver significant outperformance. In the months that follow large jumps, strategies exposing to long volatility and extreme risk tend to deliver positive performance in extreme market environments. In the months that follow small jumps, possibly as a result of trading illiquidity, most fund strategies exhibit losses in the jolting market environments. In the months that follow Brownian motion, strategies exposing to short volatility tend to deliver best performance. Hedge funds therefore deliver out-of-sample performance respective of types of jump activities on ultra-high frequency VIX.

Number of Pages in PDF File: 58

Keywords: Ultra-high frequency VIX, Infinite jump activity, Finite jump activity, Brownian motion, Hedge fund strategies

JEL Classification: G12, G13, G14

working papers series