Explaining the Negative Returns to VIX Futures and ETNs: An Equilibrium Approach

Abstract

We study the returns to investing in VIX futures and VIX Exchange Traded Notes (ETNs). We document a substantial negative return premium for both ETNs and the futures. For example, the a constant maturity portfolio of one-month VIX futures loses about 30% per year over our sample period (2006-2013). We propose an equilibrium model to explain these negative returns. In this model, increases in volatility endogenously lead to decreasing stock prices. Our model explains the negative expected returns to VIX futures and ETNs as well as several other stylized facts about the returns to VIX futures and VIX futures ETNs.

Keywords: VIX futures, volatility risk premium, present value CAPM, equilibrium, VIX ETNs, jump risk

JEL Classification: G1, G12, G13