Narrow Results

We study a series of static and dynamic portfolios of Volatility Index (VIX) futures and their effectiveness to track the VIX. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, compared to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

In this chapter, we propose and test several hypotheses concerning time series properties of trading volume, price, short, and long-term relationships between price and volume and the determinants of trading volume in foreign currency futures. The nearby contracts for British Pound, Canadian Dollar, Japanese Yen, German Mark, and Swiss Franc are analyzed in three frequencies i.e., daily, weekly, and monthly.

We find supportive evidence for all the five currencies that the price volatility is a determinant of the trading volume changes. Furthermore, the volatility of the price process is a determinant of the unexpected component of the changes in trading volume. Also, there is a significant relationship between the volatility of price and the volatility of trading volume changes for three of the five currencies in the daily frequency and for one currency in the monthly frequency.

In this chapter, we discuss the development and evolution of the CBOE's volatility index or VIX, the correlation structure of VIX with other assets, and we highlight hedge fund strategies that are exposed to volatility and that could therefore potentially benefit from the existence of derivatives that reference VIX. We also describe the development of the markets for VIX derivatives and detail their structure, as well as the development of pricing models for VIX derivatives. Finally, we describe the development of exchange-traded products (ETPs) that reference volatility, and we analyze the structure of these products. We conclude with an analysis of the performance of VIX-related ETPs, and we test the performance of simple technical trading rules that use ETPs that reference VIX. These have all been crucial to the development of volatility as a separate asset class.