Explaining the negative returns to volatility claims: An equilibrium approach

Journal of Financial Economics · 2017 · Volume 125 · Issue 1

DOI: 10.1016/j.jfineco.2017.04.007

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

Jump-diffusion, VIX ETN, Variance risk premium, Dynamic equilibrium, VIX futures

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