VIX Exchange Traded Products: Performance, Price Discovery and Hedging
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This paper investigates the performance, hedging ability and price discovery relationship between some of the most popular exchange traded products with the volatility index VIX as the underlying. We find a large difference in the price discovery function for the direct unleveraged VIX ETPs. The VIX ETPs have good trackingperformance, but suffer from time-decay due to the shape of the VIX futures termstructure. This time-decay makes them unsuitable for buy-and-hold investments,but gives rise to a profitable trading strategy using direct and inverse VIX ETPs.The strategy is robust to transaction costs. Despite being negatively correlatedwith the S&P 500, the ETPs perform poorly as hedging tools. By using simplerebalancing rules, the inclusion of VIX ETPs in a portfolio tracking the S&P 500will decrease the risk-adjusted performance of the portfolio.