Effects of nondiscretionary trading on futures prices

Abstract

This paper examines the effects of the nondiscretionary trading demands of VIX exchangetraded
products (ETPs) issuers on the prices and volumes in the VIX futures. We find that
the ETPs’ information-less, mechanical rebalancing of futures positions to maintain the
constant maturity of the index and the promised leverage ratios of the VIX ETPs have
significantly positive predictive power for end-of-day futures returns. We also show that
the impact on price has diminished through time as a result of the increased liquidity
provided by hedge funds, and the “natural” hedging of the issuers’ inverse products.

Keywords: VIX ETPs, VIX futures, contango, natural counterparties, product replication, market evolution

JEL Classification: G11, G13