Does increased hedging lead to decreased price efficiency? The case of VIX ETPs and VIX futures

Abstract

We examine the impact of the introduction of VIX exchange‐traded products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures.

Modeling VXX

“…Fernandez‐Perez, Frijns, Tourani‐Rad, and Webb () study the price dynamics of VIX futures. They find that since the introduction of VIX futures ETPs, trades in VIX futures have become less informative and pricing errors have become more persistent.…”

The impact of the US stock market opening on price discovery of government bond futures

“…To obtain the efficient price m t , we estimate a state‐space model similar to Brogaard et al (), Hendershott and Menkveld (), and Fernandes‐Perez et al (). We start by decomposing the futures price into two components, a nonstationary price process that captures the evolution of the efficient price and a transitory process that captures temporary deviations from the efficient price.…”

Time-dependent lead-lag relationships between the VIX and VIX futures markets

“…Thus, the dominance of the VIX in price discovery can be attributed to the less informativeness of the VIX futures. With the launch of VIX ETPs, trading in the VIX futures markets has become dramatically brisk (Fernandez-perez et al, 2019). Meanwhile, one can find that the VIX futures have contributed increasingly to the price discovery process of volatility.…”

“…For the purpose of accelerating trade in volatility and hedging, the CBOE launched VIX futures on March 26, 2004(Frijns et al, 2016. However, trading volume of VIX futures did not show a vigorous growth until the introduction of VIX options on February 24, 2006(Fernandez-perez et al, 2019. In January 2009, Barclays introduced the first volatility exchange traded product (ETP), termed the VXX.…”

“…In January 2009, Barclays introduced the first volatility exchange traded product (ETP), termed the VXX. The launch of VIX ETPs really expedite trading in VIX futures (Frijns et al, 2016;Fernandez-perez et al, 2019). Furthermore, there has been an booming body of research by both academics and practitioners, into many aspects of VIX and its derivatives (Frijns et al, 2016).…”