Does Increased Hedging Lead to Decreased Price Efficiency? The Case of VIX Etps and VIX Futures

24 Pages Posted: 20 May 2020

See all articles by Adrian Fernandez‐Perez

Adrian Fernandez‐Perez

Auckland University of Technology

Bart Frijns

Open University of the Netherlands - School of Management

Alireza Tourani‐Rad

Auckland University of Technology

Robert I. Webb

University of Virginia - McIntire School of Commerce

Date Written: August 2019

Abstract

We examine the impact of the introduction of VIX exchange‐traded products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures.

Keywords: market microstructure, price pressure, VIX ETPs, VIX futures

JEL Classification: C22, G13

Suggested Citation

Fernandez‐Perez, Adrian and Frijns, Bart and Tourani‐Rad, Alireza and Webb, Robert I., Does Increased Hedging Lead to Decreased Price Efficiency? The Case of VIX Etps and VIX Futures (August 2019). Financial Review, Vol. 54, Issue 3, pp. 477-500, 2019, Available at SSRN: https://ssrn.com/abstract=3601147 or http://dx.doi.org/10.1111/fire.12195

Adrian Fernandez‐Perez (Contact Author)

Auckland University of Technology

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Bart Frijns

Open University of the Netherlands - School of Management ( email )

Valkenburgerweg 177
Heerlen, NL-6401DL
Netherlands

Alireza Tourani‐Rad

Auckland University of Technology

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Robert I. Webb

University of Virginia - McIntire School of Commerce ( email )

Rouss and Robertson Halls 125 Ruppel Lane
Charlottesville, VA 22903
United States
(434) 924-7570 (Phone)

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