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

51 Pages Posted: 15 Oct 2013 Last revised: 3 Dec 2014

Bjorn Eraker

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Yue Wu

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: December 2, 2014

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

Suggested Citation

Eraker, Bjorn and Wu, Yue, Explaining the Negative Returns to VIX Futures and ETNs: An Equilibrium Approach (December 2, 2014). Available at SSRN: https://ssrn.com/abstract=2340070 or http://dx.doi.org/10.2139/ssrn.2340070

Bjorn Eraker (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Yue Wu

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

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