The Economic Value of VIX ETPs

Kim Christensen (), Charlotte Christiansen and Anders M. Posselt ()
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Kim Christensen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Aarhus University, Fuglesangs Allé 4, Building 2621, 11, 8210 Aarhus V, DK
Anders M. Posselt: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Aarhus University, Fuglesangs Allé 4, Building 2630, 20, 8210 Aarhus V, DK

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: The fairly new VIX ETPs have been promoted for providing effective and easily accessible diversification. We examine the economic value of using VIX ETPs for diversification of stock-bond portfolios. We consider seven different investment strategies based on short-sales constrained and unconstrained investors who use four different investment styles for their optimization strategy. Our analysis begins in 2009, when the first VIX ETPs are introduced, and therefore only considers the period after the recent financial crisis. For investors prohibited from short selling, the diversification benefits of the VIX ETPs do not offset the negative returns on the VIX ETPs. Hence there is a negative economic value of including VIX ETPs in stock-bond portfolios. This applies to all investment styles. It even applies when adjusting for a simulated market crash. For investors who are not constrained from selling assets short, the results are mixed as the economic value of VIX ETPs vary with respect to investment style and product.

Keywords: VIX; VIX ETPs; Portfolio diversification; Realized volatility; Mean-variance analysis (search for similar items in EconPapers)
JEL-codes: G11 G15 G23 (search for similar items in EconPapers)
Pages: 60
Date: 2019-09-18
New Economics Papers: this item is included in nep-fmk
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Journal Article: The economic value of VIX ETPs (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2019-14

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