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Does the Tail Wag the Dog? Evidence from Fund Flow to VIX ETFs and ETNs

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Abstract
This paper investigates if and how the fund flows to VIX exchange-traded funds (ETFs) and VIX exchange-traded notes (ETNs) impact the underlying volatility VIX index. The VIX ETFs and ETNs are divided into four groups depending on their investment strategy. We found that each group has a very distinctive fund flow pattern, reflecting the mean-reverting character of the VIX. We found that generally higher fund flows to VIX exchange-traded funds and notes which apply a normal tracking strategy tend to increase the value of the VIX, while higher fund flows to VIX exchange-traded funds and notes which apply an inverse tracking strategy decrease the value of the VIX. Moreover, we show that money flows to VIX exchange-traded products is insufficient to contribute to market instability during market downturns. The results of this study provide arguments for discussion on impact of exchange trade products on their underlying products (see SEC's File No. S7-11-15).

Suggested Citation

  • Jędrzej Białkowski & Huong Dieu Dang & Xiaopeng Wei, 2017. "Does the Tail Wag the Dog? Evidence from Fund Flow to VIX ETFs and ETNs," Working Papers in Economics 17/17, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:17/17
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    File URL: https://repec.canterbury.ac.nz/cbt/econwp/1717.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    VIX; Exchange-traded fund; Exchange-traded note; Fund flow; VIX future price; VIX future price term structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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