On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility?

Michael O'Neill, Gulasekaran Rajaguru, Robert Whaley

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Abstract

We analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, -1x inverse and 2x leveraged funds. We assess their impact on the VIX Futures index benchmark. Long run causal relations between ETPs and Futures are modelled over time, with evidence of significant break-downs in arbitrage associated with liquidity events, changing volatility regimes and movements in the term structure of VIX Futures. In particular, the recent collapse of complex inverse VIX ETPs highlights the limitations to liquidity in these products in unstable environments.
Original languageEnglish
Publication statusPublished - 2018
EventFinancial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse? - Vanderbilt University, Nashvile, United States
Duration: 18 May 201818 May 2018
http://www.financialinnovators.org/

Conference

ConferenceFinancial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?
Abbreviated titleFMRC
CountryUnited States
CityNashvile
Period18/05/1818/05/18
OtherExchange-traded products debuted 25 years ago and are now benchmarked to indexes in a variety of different asset markets. Some have thrived; others have failed. This year, the Financial Markets Research Center presents the Exchange-Traded Products: Blessing or Curse? conference to consider both sides – tremendous successes like SPY and failures like XIV – and to discuss important ETP issues under current debate:

Do ETPs increase or suppress volatility in the underlying benchmark securities?
Does the trading of ETPs increase the correlation in the returns of the benchmark securities?
Which drive stock returns more: ETP flows and re-balancing or fundamentals?
How has the practice of securities lending affected the fund’s expense ratio?
Do age demographics – “the millennial effect” – influence ETP asset expansion?
What is the intraday price change relation between ETPs and a cash-and-carry futures position?
Have ETFs improved stock market efficiency?
Is passive investing killing the markets?
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Volatility index
Exchange traded funds
Futures contracts
Causality
Liquidity
Term structure
Arbitrage
Benchmark

Cite this

O'Neill, M., Rajaguru, G., & Whaley, R. (2018). On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility?. Financial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?, Nashvile, United States.
O'Neill, Michael ; Rajaguru, Gulasekaran ; Whaley, Robert. / On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility?. Financial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?, Nashvile, United States.
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abstract = "We analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, -1x inverse and 2x leveraged funds. We assess their impact on the VIX Futures index benchmark. Long run causal relations between ETPs and Futures are modelled over time, with evidence of significant break-downs in arbitrage associated with liquidity events, changing volatility regimes and movements in the term structure of VIX Futures. In particular, the recent collapse of complex inverse VIX ETPs highlights the limitations to liquidity in these products in unstable environments.",
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O'Neill, M, Rajaguru, G & Whaley, R 2018, 'On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility?' Financial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?, Nashvile, United States, 18/05/18 - 18/05/18, .

On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility? / O'Neill, Michael; Rajaguru, Gulasekaran; Whaley, Robert.

2018. Financial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?, Nashvile, United States.

Research output: Contribution to conferencePresentationResearchpeer-review

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AB - We analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, -1x inverse and 2x leveraged funds. We assess their impact on the VIX Futures index benchmark. Long run causal relations between ETPs and Futures are modelled over time, with evidence of significant break-downs in arbitrage associated with liquidity events, changing volatility regimes and movements in the term structure of VIX Futures. In particular, the recent collapse of complex inverse VIX ETPs highlights the limitations to liquidity in these products in unstable environments.

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M3 - Presentation

ER -

O'Neill M, Rajaguru G, Whaley R. On the Causality Between Price Movements in VIX Exchange-traded Funds (ETFs) and VIX Futures Contracts. Do ETFs Increase Volatility?. 2018. Financial Markets Research Centre Conference - Exchange -Traded Products: Blessing or Curse?, Nashvile, United States.