Betting on mean reversion in the VIX? Evidence from ETP flows

Abstract

We evaluate the ability of different asset pricing models to explain the flows into VIX ETPs with long volatility exposure. We find no evidence supporting that investors consider systematic risk when they evaluate VIX ETP performance. Instead, investors appear to follow a simple mean reversion strategy, buying (selling) when returns are negative (positive), coinciding with low (high) levels of the VIX. We provide evidence that this mean reversion strategy is a very likely explanation for the "low premium response puzzle" in the VIX premium.

Keywords: VIX ETPs, Asset Pricing Tests, Flows, VIX Premium

JEL Classification: G11; G12; G13; G14