Explaining the Negative Returns to Volatility Products.

摘要

This dissertation studies returns to investing in volatility products with a primary focus on VIX futures and VIX Exchange Traded Products (ETPs). Substantial negative return premiums for these assets are documented. For example, the constant maturity portfolio of one-month VIX futures loses about 30% per year from 2006 to 2013. The goal of the dissertation is to understand those big negative returns.The two chapters take two different and potentially complementary perspectives to look at the issue.;The first chapter attempts a structural explanation and investigates if the negative VIX futures return premium is consistent with a notion of dynamic equilibrium. A model based on present value computation is derived and it endogenizes stock prices, the VIX index and its associated derivative contracts. The sizable negative volatility risk premium in the model is intuitively linked to the volatility feedback effect: increases in volatility endogenously lead to decreasing stock price. Both diffusive and jump shocks to cash flow volatility are priced in equilibrium and the market price of risk is a function of risk aversion and the ``deep" parameters that govern the dynamics of volatility. The model generates an upward sloping equilibrium VIX futures curve (contango) in steady state. The estimated model explains the negative returns as well as several other stylized features of the VIX futures, ETPs, and variance swap data.;The second chapter explores whether price impact due to mechanical rolling activity of VIX ETPs contributes to the catastrophic loss. Empirical evidence is provided to support this hypothesis. The shape of the VIX future term structure is found to be significantly twisted by VIX ETPs'r rolling. The performance of VIX future indices that VIX ETPs track gets much worse after the launch of VIX ETPs. Greater amount of rolling relative to the total volume of VIX futures results in bigger loss. Front running strategies taking advantage of the price impact are shown to be very profitable right after the launch of VIX ETPs. The strategies deteriorate afterwards because VIX futures market gains more liquidity relative to VIX ETPs and also possibly because of arbitrageurs' more attention over time. In line with the price impact reasoning, VIX futures deliver abnormal daily returns when there is a directional change of trade flow by VIX ETPs.