Explaining the negative returns to volatility claims: An equilibrium approach

Bjørn Eraker and Yue Wu

Journal of Financial Economics, 2017, vol. 125, issue 1, 72-98

Abstract: We study the returns to investing in VIX futures, VIX Exchange Traded Notes (ETNs), and variance swaps. We document substantial negative return premia for these assets. For example, the constant maturity portfolio of 1-month VIX futures loses about 30% per year over our sample period (2006–2013). We investigate if these findings are consistent with dynamic equilibrium. We derive a model based on present value computation that endogenizes stock prices, the VIX index, and its associated derivative contracts. The model explains the negative return premia as well as several other stylized features of the VIX futures, ETNs, and variance swap data.

Keywords: Variance risk premium; VIX futures; VIX ETN; Dynamic equilibrium; Jump-diffusion (search for similar items in EconPapers)
JEL-codes: C22 C58 G12 G13 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:125:y:2017:i:1:p:72-98

DOI: 10.1016/j.jfineco.2017.04.007

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