The Economic Value of VIX ETPs

58 Pages Posted: 18 Sep 2019

See all articles by Kim Christensen

Kim Christensen

Aarhus University - CREATES

Charlotte Christiansen

Aarhus University - CREATES

Anders Merrild Posselt

Aarhus University - CREATES

Date Written: September 9, 2019

Abstract

The fairly new VIX ETPs have been promoted for providing effective and easily accessible diversification. We examine the economic value of using VIX ETPs for diversification of stock-bond portfolios. We consider seven different investment strategies based on short-sales constrained and unconstrained investors who use four different investment styles for their optimization strategy. Our analysis begins in 2009, when the first VIX ETPs are introduced, and therefore only considers the period after the recent financial crisis. For investors prohibited from short selling, the diversification benefits of the VIX ETPs do not offset the negative returns on the VIX ETPs. Hence there is a negative economic value of including VIX ETPs in stock-bond portfolios. This applies to all investment styles. It even applies when adjusting for a simulated market crash. For investors who are not constrained from selling assets short, the results are mixed as the economic value of VIX ETPs vary with respect to investment style and product.

Keywords: VIX; VIX ETPs; Portfolio diversification; Realized volatility; Mean-variance analysis

JEL Classification: G11; G15; G23

Suggested Citation

Christensen, Kim and Christiansen, Charlotte and Posselt, Anders Merrild, The Economic Value of VIX ETPs (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=3450829 or http://dx.doi.org/10.2139/ssrn.3450829

Kim Christensen

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Anders Merrild Posselt

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus, 8210
Denmark

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