VIX Exchange Traded Products: Price Discovery, Hedging and Trading Strategy

Journal of Futures Markets, Forthcoming

25 Pages Posted: 24 Mar 2016  

Christoffer Bordonado

Norwegian University of Science and Technology (NTNU)

Peter Molnár

University of Stavanger

Sven Samdal

Norwegian University of Science and Technology (NTNU)

Date Written: March 22, 2016

Abstract

This paper investigates the most traded VIX exchange traded products (ETPs) with focus on their performance, price discovery, hedging ability and trading strategy. The VIX ETPs track their benchmark indices well. They are therefore exposed to the same time-decay (high negative expected returns) as these indices. This makes them unsuitable for buy-and-hold investments, but it gives rise to a highly profitable trading strategy. Despite being negatively correlated with the S&P 500, the ETPs perform poorly as a hedging tool; their inclusion in a portfolio based on S&P 500 will decrease the risk-adjusted performance of the portfolio.

Keywords: VIX, exchange traded products, volatility, trading strategy

JEL Classification: G13

Suggested Citation

Bordonado, Christoffer and Molnár, Peter and Samdal, Sven, VIX Exchange Traded Products: Price Discovery, Hedging and Trading Strategy (March 22, 2016). Journal of Futures Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2753300

Christoffer Bordonado

Norwegian University of Science and Technology (NTNU) ( email )

Trondheim NO-7491
Norway

Peter Molnár (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, 4036
Norway

Sven Samdal

Norwegian University of Science and Technology (NTNU) ( email )

Trondheim NO-7491
Norway

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