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

Ole Linnemann Nielsen; Anders Merrild Posselt

doi:10.1016/j.irfa.2024.103421

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

Ole Linnemann Nielsen, Anders Merrild Posselt^*

^*Corresponding author for this work

Department of Economics and Business Economics

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

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.

Original language	English
Article number	103421
Journal	International Review of Financial Analysis
Volume	95
Issue	Part B
ISSN	1057-5219
DOIs	https://doi.org/10.1016/j.irfa.2024.103421
Publication status	Published - Oct 2024

Keywords

Asset pricing tests
Flows
VIX ETPs
VIX premium

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10.1016/j.irfa.2024.103421Licence: CC BY

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title = "Betting on mean reversion in the VIX? Evidence from ETP flows",

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.",

keywords = "Asset pricing tests, Flows, VIX ETPs, VIX premium",

author = "Nielsen, {Ole Linnemann} and Posselt, {Anders Merrild}",

year = "2024",

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doi = "10.1016/j.irfa.2024.103421",

language = "English",

volume = "95",

journal = "International Review of Financial Analysis",

issn = "1057-5219",

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T1 - Betting on mean reversion in the VIX? Evidence from ETP flows

AU - Nielsen, Ole Linnemann

AU - Posselt, Anders Merrild

PY - 2024/10

Y1 - 2024/10

N2 - 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.

AB - 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.

KW - Asset pricing tests

KW - Flows

KW - VIX ETPs

KW - VIX premium

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U2 - 10.1016/j.irfa.2024.103421

DO - 10.1016/j.irfa.2024.103421

M3 - Journal article

AN - SCOPUS:85197537531

SN - 1057-5219

VL - 95

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

IS - Part B

M1 - 103421

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

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