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Betting on mean reversion in the VIX? Evidence from ETP flows

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  • Nielsen, Ole Linnemann
  • Posselt, Anders Merrild

Abstract

We investigate how investors apply VIX ETPs with long VIX exposure by analyzing the relation between the flows of these products and the VIX. We find that increases in the VIX are followed by outflows meaning that VIX ETP investors, in aggregate reduce their VIX ETP positions immediately after there is an increase in market risk. Since the returns of VIX ETPs are closely linked to the VIX, our results imply that VIX ETP investors expect mean reversals in market risk. By comparing the ability of different asset pricing models to predict the flows, we find no evidence that investors in VIX ETPs consider systematic risk factors. Finally, studying the relation between VIX ETP flows and the VIX premium, we find that large outflows following increases in the VIX may be the cause of the low response puzzle in the VIX premium.

Suggested Citation

  • Nielsen, Ole Linnemann & Posselt, Anders Merrild, 2024. "Betting on mean reversion in the VIX? Evidence from ETP flows," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003533
    DOI: 10.1016/j.irfa.2024.103421
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    More about this item

    Keywords

    VIX ETPs; Flows; Asset pricing tests; VIX premium;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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