Effects of nondiscretionary trading on futures prices

71 Pages Posted: 8 Jul 2021

See all articles by Michael O'Neill

Michael O'Neill

Bond University - Bond Business School

Robert E. Whaley

Vanderbilt University - Finance

Date Written: June 17, 2021

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

Suggested Citation

O'Neill, Michael and Whaley, Robert E., Effects of nondiscretionary trading on futures prices (June 17, 2021). Available at SSRN: https://ssrn.com/abstract=3880082 or http://dx.doi.org/10.2139/ssrn.3880082

Michael O'Neill

Bond University - Bond Business School ( email )

Gold Coast
Australia

Robert E. Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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