Volatility Exchange-Traded Notes: Curse or Cure?

Alexander, Carol; Korovilas, Dimitris

doi:10.2139/ssrn.2062854

Cited by 22 publications

(26 citation statements)

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“…in comparison with equity index futures) that players must include investors and hedgers, not only traders and speculators. However, these products have very different trading and statistical characteristics to variance swaps, as shown by Alexander and Korovilas (2013) and others.…”

Section: Literature Reviewmentioning

confidence: 99%

Diversification with volatility products

Alexander

Korovilas²,

Kapraun

2016

Journal of International Money and Finance

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Recent changes to clearing-house regulations have promoted exchange-traded products offering risk premia previously accessible only over-the-counter. Thus, as correlations increase between equity, bonds and commodities, a new strand of research questions the benefits of home-grown diversification using volatility products. First we ask: "What expected returns will induce equity and bond investors to perceive ex-ante diversification benefits from adding volatility?" We call this the optimal diversification threshold. We derive the theoretical thresholds for minimum-variance, mean-variance and Black-Litterman optimization. Empirical analysis of US and European markets shows that volatility diversification is frequently perceived to be optimal, ex-ante, but these apparent benefits are almost never realized, being eroded by high roll and transaction costs. Exchange-traded volatility only proved an effective diversifier during the banking crisis. At other times long equity and bond portfolios diversified with volatility futures have not performed as well as those without diversification, or even those diversified with commodities.JEL classification: G11, G15, G23

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Section: Literature Reviewmentioning

confidence: 99%

Diversification with volatility products

Alexander

Korovilas²,

Kapraun

2016

Journal of International Money and Finance

Self Cite

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“…Alexander and Korovilas [2013] speculated that this ratio is employed because the VIX Short-Term Futures Index has a long-run volatility approximately twice that of the Mid-Term Index.…”

Section: An Operational Emn Portfolio-construction Methodsmentioning

confidence: 99%

“…The index is a weighted blend of prices for a range of S&P 500 Index options that are traded on the CBOE. The VIX Index itself is not tradable, but the CBOE began trading futures contracts on the VIX on Since the introduction of VIX futures, various VIX-related instruments have been formulated (see Alexander and Korovilas [2013]). Researchers and practitioners have become increasingly interested in VIX derivatives in terms of their use in both (1) volatility selling (see Carr and Wu [2009]; Rhoads [2011]; Sinclair [2013]) and (2) portfolio protection strategies (Dash and Moran [2005]; Chen, Chung, and Ho [2011]; Mencía and Sentana [2013]).…”

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confidence: 99%

Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM

Chen

Tindall

2016

JAI

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“…Husson and McCann (2011), Deng et al (2012), Alexander and Korovilas (2013), and Whaley (2013)). In fact, most of these ETFs or ETNs follow a static strategy or time-deterministic allocation that does not adapt to the rapidly changing market.…”

Section: Introductionmentioning

confidence: 99%

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

Leung

Ward

2017

SSRN Journal

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We develop a methodology for index tracking and risk exposure control using financial derivatives. Under a continuous-time diffusion framework for price evolution, we present a pathwise approach to construct dynamic portfolios of derivatives in order to gain exposure to an index and/or market factors that may be not directly tradable. Among our results, we establish a general tracking condition that relates the portfolio drift to the desired exposure coefficients under any given model. We also derive a slippage process that reveals how the portfolio return deviates from the targeted return. In our multifactor setting, the portfolio's realized slippage depends not only on the realized variance of the index, but also the realized covariance among the index and factors. We implement our trading strategies under a number of models, and compare the tracking strategies and performances when using different derivatives, such as futures and options.

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Volatility Exchange-Traded Notes: Curse or Cure?

Cited by 22 publications

References 0 publications

Diversification with volatility products

Diversification with volatility products

Constructing Equity Market–Neutral VIX Portfolios with Dynamic CAPM

Dynamic Index Tracking and Risk Exposure Control Using Derivatives

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