IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v61y2021icp103-117.html
   My bibliography  Save this article

Tracking performance of VIX futures ETPs

Author

Listed:
  • Gehricke, Sebastian A.
  • Zhang, Jin E.

Abstract

We find that, at the daily level, none of the VIX futures Exchange-Traded Products (ETPs) track their intrinsic values perfectly, although the tracking improves at the weekly and monthly frequency. We show that all products tracking deviations are driven by mainly driven by limits to arbitrage, measured by market conditions, liquidity and transaction costs. Exchange-Traded Funds’ (ETFs’) deviations are more significantly related to fund flows, which shows authorized participants taking advantage of arbitrage opportunities by creating/redeeming ETF units. The Exchange-Traded Notes (ETNs) do not have this mechanism, creation and redemption is reliant on the issuers and delayed, so their deviations are less related to flows.

Suggested Citation

  • Gehricke, Sebastian A. & Zhang, Jin E., 2021. "Tracking performance of VIX futures ETPs," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 103-117.
    • Handle: RePEc:eee:empfin:v:61:y:2021:i:c:p:103-117
    DOI: 10.1016/j.jempfin.2021.01.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539821000025
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2021.01.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Sebastian A. Gehricke & Jin E. Zhang, 2020. "Modeling VXX under jump diffusion with stochastic long‐term mean," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1508-1534, October.
    2. Delcoure, Natalya & Zhong, Maosen, 2007. "On the premiums of iShares," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 168-195, March.
    3. DeLisle, R. Jared & McTier, Brian C. & Smedema, Adam R., 2016. "Systematic limited arbitrage and the cross-section of stock returns: Evidence from exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 118-136.
    4. Dew-Becker, Ian & Giglio, Stefano & Le, Anh & Rodriguez, Marius, 2017. "The price of variance risk," Journal of Financial Economics, Elsevier, vol. 123(2), pages 225-250.
    5. Sebastian A. Gehricke & Jin E. Zhang, 2020. "The implied volatility smirk in the VXX options market," Applied Economics, Taylor & Francis Journals, vol. 52(8), pages 769-788, February.
    6. Mencía, Javier & Sentana, Enrique, 2013. "Valuation of VIX derivatives," Journal of Financial Economics, Elsevier, vol. 108(2), pages 367-391.
    7. Jinghong Shu & Jin E. Zhang, 2012. "Causality in the VIX futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(1), pages 24-46, January.
    8. Bart Frijns & Alireza Tourani‐Rad & Robert I. Webb, 2016. "On the Intraday Relation Between the VIX and its Futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(9), pages 870-886, September.
    9. Nicolas P.B. Bollen & Michael J. O'Neill & Robert E. Whaley, 2017. "Tail Wags Dog: Intraday Price Discovery in VIX Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(5), pages 431-451, May.
    10. Alexander, Carol & Korovilas, Dimitris & Kapraun, Julia, 2016. "Diversification with volatility products," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 213-235.
    11. Rajarshi Aroskar & Willaim A. Ogden, 2012. "An analysis of exchange traded notes tracking errors with their underlying indexes and indicative values," Applied Financial Economics, Taylor & Francis Journals, vol. 22(24), pages 2047-2062, December.
    12. Hui Chen & Scott Joslin & Sophie X. Ni, 2019. "Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets," NBER Working Papers 25573, National Bureau of Economic Research, Inc.
    13. Christoffer Bordonado & Peter Molnár & Sven R. Samdal, 2017. "VIX Exchange Traded Products: Price Discovery, Hedging, and Trading Strategy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(2), pages 164-183, February.
    14. Hui Chen & Scott Joslin & Sophie Xiaoyan Ni, 2019. "Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 32(1), pages 228-265.
    15. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    16. Charteris, Ailie & Chau, Frankie & Gavriilidis, Konstantinos & Kallinterakis, Vasileios, 2014. "Premiums, discounts and feedback trading: Evidence from emerging markets' ETFs," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 80-89.
    17. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    18. Chen, Yu-Lun & Tsai, Wei-Che, 2017. "Determinants of price discovery in the VIX futures market," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 59-73.
    19. Jin E. Zhang & Jinghong Shu & Menachem Brenner, 2010. "The new market for volatility trading," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(9), pages 809-833, September.
    20. Shin, Sangheon & Soydemir, Gökçe, 2010. "Exchange-traded funds, persistence in tracking errors and information dissemination," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 214-234, December.
    21. Chen, Hsuan-Chi & Chung, San-Lin & Ho, Keng-Yu, 2011. "The diversification effects of volatility-related assets," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1179-1189, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sebastian A. Gehricke & Jin E. Zhang, 2020. "Modeling VXX under jump diffusion with stochastic long‐term mean," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1508-1534, October.
    2. James S. Doran, 2020. "Volatility as an asset class: Holding VIX in a portfolio," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 841-859, June.
    3. Milan Bašta & Peter Molnár, 2019. "Long‐term dynamics of the VIX index and its tradable counterpart VXX," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 322-341, March.
    4. Anders Merrild Posselt, 2022. "Dynamics in the VIX complex," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1665-1687, September.
    5. Sebastian A. Gehricke & Jin E. Zhang, 2018. "Modeling VXX," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(8), pages 958-976, August.
    6. Chen, Yu-Lun & Yang, J. Jimmy, 2021. "Trader positions in VIX futures," Journal of Empirical Finance, Elsevier, vol. 61(C), pages 1-17.
    7. Xinglin Yang & Ji Chen, 2021. "VIX term structure: The role of jump propagation risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(6), pages 785-810, June.
    8. Yan-Hong Yang & Ying-Hui Shao, 2019. "Time-dependent lead-lag relationships between the VIX and VIX futures markets," Papers 1910.13729, arXiv.org.
    9. Xiaoyu Tan & Chengxiang Wang & Wei Lin & Jin E. Zhang & Shenghong Li & Xuejun Zhao & Zili Zhang, 2021. "The term structure of the VXX option smirk: Pricing VXX option with a two‐factor model and asymmetry jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(4), pages 439-457, April.
    10. Yang, Yan-Hong & Shao, Ying-Hui, 2020. "Time-dependent lead-lag relationships between the VIX and VIX futures markets," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    11. Hsiu-Chuan Lee & Donald Lien & Her-Jiun Sheu, 2023. "Hedging performance of volatility index futures: a partial cointegration approach," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 265-294, July.
    12. Christensen, Kim & Christiansen, Charlotte & Posselt, Anders M., 2020. "The economic value of VIX ETPs," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 121-138.
    13. Gonzalez-Perez, Maria T., 2015. "Model-free volatility indexes in the financial literature: A review," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 141-159.
    14. Adrian Fernandez‐Perez & Bart Frijns & Ilnara Gafiatullina & Alireza Tourani‐Rad, 2018. "Determinants of intraday price discovery in VIX exchange traded notes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(5), pages 535-548, May.
    15. Yi‐Wei Chuang & Wei‐Che Tsai & Ming‐Hung Wu, 2020. "The impact of net buying pressure on VIX option prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(2), pages 209-227, February.
    16. Gaoxiu Qiao & Gongyue Jiang, 2023. "VIX futures pricing based on high‐frequency VIX: A hybrid approach combining SVR with parametric models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(9), pages 1238-1260, September.
    17. Gregor Dorfleitner & Anna Gerl & Johannes Gerer, 2018. "The pricing efficiency of exchange-traded commodities," Review of Managerial Science, Springer, vol. 12(1), pages 255-284, January.
    18. Taylor, Nick, 2019. "Forecasting returns in the VIX futures market," International Journal of Forecasting, Elsevier, vol. 35(4), pages 1193-1210.
    19. Gruenthaler, Thomas & Lorenz, Friedrich & Meyerhof, Paul, 2022. "Option-based intermediary leverage," Journal of Banking & Finance, Elsevier, vol. 145(C).
    20. Cheng, Jun & Ibraimi, Meriton & Leippold, Markus & Zhang, Jin E., 2012. "A remark on Lin and Chang's paper ‘Consistent modeling of S&P 500 and VIX derivatives’," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 708-715.

    More about this item

    Keywords

    VIX; VIX futures; Exchange-traded products (ETPs); Tracking performance; Limits to arbitrage; Hedging pressure;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:61:y:2021:i:c:p:103-117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.