Volatility Timing Using ETF Options: Evidence from Hedge Funds

47 Pages Posted: 19 Oct 2022 Last revised: 25 Mar 2024

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business

Zhen Shi

Georgia State University

Date Written: October 13, 2022

Abstract

We find that hedge funds’ positions in exchange-traded fund (ETF) options contain volatility information about underlying ETF returns. Greater hedge fund option demand predicts higher variance of ETF returns over the following quarter and on days of macroeconomic news. The predictive power holds for options on equity and non-equity (e.g., fixed income, currency) ETFs. A tracking portfolio of straddles based on funds’ straddle positions earns quarterly abnormal returns of 7.95%. Net of fees, funds using ETF straddles deliver lower risk and higher benchmark-adjusted returns than nonusers. We conclude that ETF options are an important venue for market volatility timing strategies.

Keywords: Hedge funds, Exchange-traded funds, Options, Volatility timing

JEL Classification: G11, G12, G23

Suggested Citation

Aragon, George O. and Chen, Shuaiyu and Shi, Zhen, Volatility Timing Using ETF Options: Evidence from Hedge Funds (October 13, 2022). Available at SSRN: https://ssrn.com/abstract=4246146 or http://dx.doi.org/10.2139/ssrn.4246146

George O. Aragon

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Shuaiyu Chen

Purdue University - Mitchell E. Daniels, Jr. School of Business ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Zhen Shi (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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