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VIX Exchange Traded Products: Price Discovery, Hedging and Trading Strategy

Last Updated on 10 February, 2024 by Rejaul Karim

In this research paper, “VIX Exchange Traded Products: Price Discovery, Hedging and Trading Strategy,” authored by Christoffer Bordonado, Peter Molnár, and Sven Samdal, the inquiry revolves around the examination of the most traded VIX exchange traded products (ETPs) with a specific focus on their performance, price discovery mechanisms, hedging capabilities, and potential trading strategies.

The VIX ETPs demonstrate adept tracking of their benchmark indices, making them susceptible to the same time-decay phenomenon characterized by high negative expected returns. Consequently, these products are deemed unsuitable for buy-and-hold investment strategies.

However, this inherent characteristic gives rise to a notably profitable trading strategy. Despite their negative correlation with the S&P 500, the research reveals that these ETPs perform poorly as hedging tools. In fact, their inclusion in a portfolio based on the S&P 500 is shown to decrease the risk-adjusted performance of the overall portfolio.

In exploring the nuanced dynamics of VIX ETPs, the paper not only provides insights into their performance and price discovery mechanisms but also sheds light on their limitations as hedging instruments.

Furthermore, the identification of a potentially lucrative trading strategy adds a practical dimension to the understanding of these VIX-related exchange-traded products in the context of market dynamics and investment strategies.

Abstract Of Paper

This paper investigates the most traded VIX exchange traded products (ETPs) with focus on their performance, price discovery, hedging ability and trading strategy. The VIX ETPs track their benchmark indices well. They are therefore exposed to the same time-decay (high negative expected returns) as these indices. This makes them unsuitable for buy-and-hold investments, but it gives rise to a highly profitable trading strategy. Despite being negatively correlated with the S&P 500, the ETPs perform poorly as a hedging tool; their inclusion in a portfolio based on S&P 500 will decrease the risk-adjusted performance of the portfolio.

Original paper – Download PDF

Here you can download the PDF and original paper of VIX Exchange Traded Products: Price Discovery, Hedging, and Trading Strategy.

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Author

Christoffer Bordonado
Norwegian University of Science and Technology (NTNU)

Peter Molnár
University of Stavanger

Sven Samdal
Norwegian University of Science and Technology (NTNU)

 

Conclusion

In this examination led by Christoffer Bordonado, Peter Molnár, and Sven Samdal, the spotlight is on the most traded VIX exchange-traded products (ETPs), delving into their performance, price discovery, hedging capabilities, and trading strategy.

The findings reveal that these VIX ETPs effectively track their benchmark indices, exposing them to the same time-decay with high negative expected returns, rendering them unsuitable for conventional buy-and-hold investments. However, this characteristic gives rise to a remarkably profitable trading strategy.

Despite their negative correlation with the S&P 500, the ETPs prove to be less effective as hedging tools, showcasing poor performance in risk-adjusted terms. Their inclusion in a portfolio based on the S&P 500 is observed to decrease the overall risk-adjusted performance of the portfolio.

In summary, this research sheds light on the dynamics of VIX exchange-traded products, emphasizing their unsuitability for traditional buy-and-hold strategies but highlighting a lucrative trading approach.

The insights gained provide valuable considerations for practitioners navigating the complexities of incorporating VIX ETPs into their portfolios and underscore the importance of understanding the nuanced dynamics of volatility in crafting effective trading strategies.

Related Reading:

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The Capacity of Trading Strategies

FAQ

Q1: What is the focus of the research paper “VIX Exchange Traded Products: Price Discovery, Hedging, and Trading Strategy”?

A1: The research paper explores various aspects of VIX exchange-traded products (ETPs). It focuses on their performance, price discovery, hedging capabilities, and potential trading strategies.

Q2: What are the key findings regarding the suitability of VIX ETPs for long-term investments and hedging?

A2: The research suggests that VIX ETPs are not suitable for long-term investments due to high negative expected returns resulting from time-decay. Additionally, despite having a negative correlation with the S&P 500, they perform poorly as hedging tools and may reduce the risk-adjusted performance of a portfolio based on the S&P 500.

Q3: In what context can VIX ETPs be effectively used, according to the research paper?

A3: The research paper indicates that VIX ETPs can be used profitably in short-term trading strategies. While unsuitable for long-term investment and hedging, they offer potential opportunities for traders looking to capitalize on market volatility.

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