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Volatility-Related Exchange Traded Assets: An Econometric Investigation

Author

Listed:
  • Javier Mencía
  • Enrique Sentana

Abstract

We develop a theoretical framework for covariance stationary but persistent positively valued processes which combines a semi-nonparametric expansion of the Gamma distribution with a component version of the multiplicative error model. Our conditional mean assumption allows for slow, possibly nonmonotonic mean-reversion, while our distribution assumption provides more flexibility than a traditional Laguerre expansion while preserving positivity of the density. We apply our framework to a dynamic portfolio allocation for Exchange Traded Notes tracking short- and mid-term VIX futures indices, which are increasingly popular but risky financial instruments. We show the superior performance of the strategies based on our econometric model.

Suggested Citation

  • Javier Mencía & Enrique Sentana, 2018. "Volatility-Related Exchange Traded Assets: An Econometric Investigation," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(4), pages 599-614, October.
    • Handle: RePEc:taf:jnlbes:v:36:y:2018:i:4:p:599-614
    DOI: 10.1080/07350015.2016.1216852
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    Cited by:

    1. León, Ángel & Ñíguez, Trino-Manuel, 2020. "Modeling asset returns under time-varying semi-nonparametric distributions," Journal of Banking & Finance, Elsevier, vol. 118(C).
    2. Barletta, Andrea & Santucci de Magistris, Paolo & Violante, Francesco, 2019. "A non-structural investigation of VIX risk neutral density," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 1-20.
    3. repec:rim:rimwps:18-26 is not listed on IDEAS

    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions

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