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

44 Pages Posted: 2 Mar 2020 Last revised: 3 Sep 2021

See all articles by Ole Linnemann Nielsen

Ole Linnemann Nielsen

Aarhus University - CREATES

Anders Merrild Posselt

Aarhus University - CREATES

Date Written: September 1, 2021

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

Suggested Citation

Nielsen, Ole Linnemann and Posselt, Anders Merrild, Betting on mean reversion in the VIX? Evidence from ETP flows (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3529285 or http://dx.doi.org/10.2139/ssrn.3529285

Ole Linnemann Nielsen

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Anders Merrild Posselt (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus, 8210
Denmark

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