TY - JOUR
T1 - The economics of the financial market for volatility trading
AU - Ruan, Xinfeng
AU - Zhang, Jin E.
N1 - Publisher Copyright:
© 2020 Elsevier B.V.
PY - 2021/1
Y1 - 2021/1
N2 - We examine the economics of the financial market for volatility trading based on an equilibrium model with three kinds of traders: dealers, asset managers, and leveraged funds. Our model reveals that the negative price of volatility is due to the high short positions of dealers, low short positions of leveraged funds, and high long positions of asset managers. It also explains well the negative variance risk premium and the negative returns of volatility derivatives. Our empirical analysis based on VIX futures position data with weekly frequency from 2006 to 2016, furthermore, supports the model's implications.
AB - We examine the economics of the financial market for volatility trading based on an equilibrium model with three kinds of traders: dealers, asset managers, and leveraged funds. Our model reveals that the negative price of volatility is due to the high short positions of dealers, low short positions of leveraged funds, and high long positions of asset managers. It also explains well the negative variance risk premium and the negative returns of volatility derivatives. Our empirical analysis based on VIX futures position data with weekly frequency from 2006 to 2016, furthermore, supports the model's implications.
KW - Equilibrium
KW - VIX futures
KW - Variance risk premium
KW - Volatility trading
UR - http://www.scopus.com/inward/record.url?scp=85083774830&partnerID=8YFLogxK
U2 - 10.1016/j.finmar.2020.100556
DO - 10.1016/j.finmar.2020.100556
M3 - Article
AN - SCOPUS:85083774830
SN - 1386-4181
VL - 52
JO - Journal of Financial Markets
JF - Journal of Financial Markets
M1 - 100556
ER -