Betting against VIX: Magic Money Tree or Ticking Time Bomb?

Specialeforsvar ved Karoline Kromann Eriksen

Titel: Betting against VIX: Magic Money Tree or Ticking Time Bomb?  

Abstract: Leveraged and inverse exchange traded products (ETPs) linked to futures contracts on the CBOE S&P500 Volatility Index (VIX) have grown in assets under management during recent years - especially the inverse products which until recently were a very profitable investment. This thesis examines the dynamics of the leveraged and inverse short-term volatility ETPs. A formula connecting the return of the funds with the return of their underlying index, its realized variance during the investment horizon, the leverage factor, the management fees as well as the interest rate is derived and tested empirically for the four major leveraged and inverse VIX ETPs using return data from 2012 to end of 2017. The results indicate excellent agreement between the formula and the observed data. They highlight the fact that the products do not replicate the corresponding leveraged returns of the underlying futures index exactly and that they will lose value over time if the realized volatility of the index is large. Additionally, some of the implications for the underlying VIX futures market of the trading happening due to the product design of the ETPs are investigated using intraday tick data from the CBOE Futures Exchange from 2010 to 2017. The empirical results show that while the flows from leveraged and inverse VIX ETPs contribute to increased volatility and price pressure of their underlying futures near end-of-day they are likely to be an explanatory factor behind the improved liquidity of the futures over time which is to the advantage of investors in VIX futures as well as the ETPs 

Vejledere: Rolf Poulsen, Søren B. BrøggerCBS
Censor:     David Sloth Pedersen, Danske Bank