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The economics of the financial market for volatility trading

Xinfeng Ruan and Jin E. Zhang

Journal of Financial Markets, 2021, vol. 52, issue C

Abstract: We examine the economics of the financial market for volatility trading based on an equilibrium model with three kinds of traders: dealers, asset managers, and leveraged funds. Our model reveals that the negative price of volatility is due to the high short positions of dealers, low short positions of leveraged funds, and high long positions of asset managers. It also explains well the negative variance risk premium and the negative returns of volatility derivatives. Our empirical analysis based on VIX futures position data with weekly frequency from 2006 to 2016, furthermore, supports the model's implications.

Keywords: Volatility trading; Variance risk premium; VIX futures; Equilibrium (search for similar items in EconPapers)
JEL-codes: D53 G11 G12 G13 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:52:y:2021:i:c:s1386418120300252

DOI: 10.1016/j.finmar.2020.100556

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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