The Stock Market Impact of Volatility Hedging: Evidence from End-of-Day Trading by VIX ETPs

56 Pages Posted: 7 Jun 2023 Last revised: 23 Aug 2023

See all articles by Christine Bangsgaard

Christine Bangsgaard

Aarhus University, Department of Economics and Business Economics

Thomas Kokholm

School of Business and Social Sciences, Aarhus University

Date Written: June 6, 2023

Abstract

VIX futures market makers can hedge their volatility exposure by trading SPX options and SPX futures. We use the daily VIX futures demand by VIX ETP issuers as an estimate of the end-of-day shock to market makers' net position and find that the demand impacts the SPX futures market in the direction consistent with the VIX futures hedging channel. The VIX ETP demand is a strong predictor of the end-of-day SPX futures return in-sample and out-of-sample, and historically it has been possible to monetize the hedging impact. We find some evidence of a subsequent reversal, suggesting that VIX futures hedging activities can move the SPX futures market for reasons unrelated to price discovery.

Keywords: Price impact, volatility hedging, SPX futures, VIX futures, VIX ETPs

JEL Classification: G12, G13, G14, G23

Suggested Citation

Bangsgaard, Christine and Kokholm, Thomas, The Stock Market Impact of Volatility Hedging: Evidence from End-of-Day Trading by VIX ETPs (June 6, 2023). Available at SSRN: https://ssrn.com/abstract=4470636 or http://dx.doi.org/10.2139/ssrn.4470636

Christine Bangsgaard

Aarhus University, Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V, DK-8210
Denmark

Thomas Kokholm (Contact Author)

School of Business and Social Sciences, Aarhus University ( email )

Fuglesangs Allé 4
Aarhus, DK-8210
Denmark

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