Exchange-traded Products Research Articles

Asymmetric impact of energy prices on financial cycles based on interval time series modeling

Energy prices crucially affect financial cycles. We employ the bivariate empirical mode decomposition (BEMD) model to disaggregate the daily interval data of the volatility index (VIX) and rely on the threshold autoregressive interval model (TARI) to incorporate energy prices into the forecasting model. Furthermore, the threshold interval decomposition ensemble (TIDE) is used to forecast the VIX series with nonlinearities to improve the forecasting accuracy. Moreover, we apply the root mean square error (RMSE) and the Diebold–Mariano test (DM) to evaluate the TIDE model performance across various frequency components and the final integration results. This paper demonstrates a significant correlation between energy prices and financial cycles, along with a temporal asymmetry effect. While the impact of energy prices on improving VIX forecasting is minimal in the short term, it becomes substantial over medium and long terms. Specifically, the influence of liquefied petroleum gas (LPG) prices on the VIX is notable in both medium and long terms. Our results offer new insights and methodologies for predicting financial cycles, assisting investors in evaluating volatility-related exchange-traded products. Additionally, these findings are crucial for developing more effective policies to promote green energy development.

A Review on Exchange Traded Products: Taxonomy, Risk and Mitigations

A Review on Exchange Traded Products: Taxonomy, Risk and Mitigations

Price discovery between Bitcoin spot markets and exchange traded products

We examine price discovery dynamics between Bitcoin exchange-traded products (ETPs) and spot markets on centralised cryptocurrency exchanges. We apply four popular price discovery measures to ETP and spot transaction data between August 2021 and July 2022. Our results show that price discovery is dominated by the spot market across all measures and sampling frequencies. This implies that ETP markets play a smaller role in the incorporation of new information about Bitcoin prices, and that informed investors largely prefer to trade on spot markets that offer significantly deeper liquidity and operate round the clock.

Causality of price movements in VIX exchange-traded products and VIX futures contracts

PurposeThe authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX Futures index benchmark.Design/methodology/approachLong-run causal relations between daily price movements in ETPs and futures are established, and the impact of rebalancing activity of leveraged and inverse ETPs evidenced through causal relations in the last 30 min of daily trading.FindingsHigh frequency lead lag relations are observed, demonstrating opportunities for arbitrage, although these tend to be short-lived and only material in times of market dislocation.Originality/valueThe causal relations between VXX and VIX Futures are well established with leads and lags generally found to be short-lived and arbitrage relations holding. The authors go further to capture 1x long, −1x inverse as well as 2x leveraged ETNs and the corresponding ETFs, to give a broad representation across the ETP market. The authors establish causal relations between inverse and leveraged products where causal relations are not yet documented.

Harnessing the Power of Exchange-Traded Products for Commodity Exposure

Exchange-traded products have proven to be an efficient and effective means for investors to gain access to asset classes such as commodities. After several years of a prolonged drawdown, commodities are beginning to regain favor with investors; however, excessive volatility and the historic propensity for large drawdowns remain an impediment for the asset class. Active managers have long successfully used time-tested principles, such as momentum, to successfully regulate exposure to commodities. In this article, the author puts forth a straightforward methodology using time-series momentum applied to commodity exchange-traded products to produce a dynamic portfolio that can provide exposure to the asset class while mitigating risk.

Decomposition of Tracking Difference Components for Leveraged Exchange Traded Products

Decomposition of Tracking Difference Components for Leveraged Exchange Traded Products

Levered and Inverse Exchange-Traded Products: Evidence from Simulations

Levered exchange-traded products have been criticized as offering inferior long-term returns for two reasons: their higher volatility and, apparently, the belief that volatility diminishes long-term expected returns. Following the approach of Pessina and Whaley (2021) we analyze simulated returns of levered and inverse exchange traded funds (ETFs) and conclude that their expected long-run values are not diminished by volatility. We identity natural counterparties to the rebalancing trades of levered exchange traded funds (LETFs) and analyze the impact of autocorrelation on daily-rebalanced LETF returns, theoretically and empirically, for both LETFs and their counterparties. The results indicate that negative (positive) autocorrelation in daily returns will cause LETFs to perform relatively poorly (well) and their counterparties to perform relatively well (poorly). Accordingly, the extent to which levered and inverse ETFs have legitimate hedging applications and reasonable risk-adjusted returns (setting aside trading costs and fund expenses) depends on the extent to which the underlying returns are consistent with weak-form market efficiency.

Effects of nondiscretionary trading on futures prices

AbstractThis paper examines the effects of the nondiscretionary trading demands of volatility index (VIX) exchange‐traded products (ETPs) issuers on the prices and volumes in the VIX futures. We find that the ETPs' informationless, 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 from increased liquidity provided by hedge funds, and the “natural” hedging of the issuers' inverse products.

The Behavior of Bitcoin Implied Volatility

The implications for exchange-traded products and delta-hedging options

Dynamics of information leadership in the volatility complex with trading time changes: Evidence from VIX futures and VIX ETPs

We examine the effect of VIX futures’ new trading hours on price discovery as these causal relations have not been investigated before and are consequential for regulators and practitioners involved in the VIX futures market. Our data include VIX futures and VIX ETPs for four different periods in which trading hours were changed. Employing three different measures of information share, we find that VXX ETN leads VIX futures in 2009 and 2010, while in 2011 and 2013, the ETPs’ leadership varies depending on the exchange-traded product under consideration. Furthermore, in 2013 before the change of trading hours, the VIX futures contribute more to price discovery than they do after trading hours expansion. Less of the price discovery occurs from the exchange-traded products in the latter half of the trading period in 2010. OLS regression results of the determinants of price discovery as well as panel regression results show that the effect of volume and spread, which are the main determinants of price discovery in the prior literature, change significantly before and after futures trading hour expansions, for both VIX futures and ETPs.

Dynamics in the VIX complex

AbstractThis paper provides a characterization of the dynamic interactions in the Volatility Index (VIX) complex, composed of the VIX itself, the term structure of VIX futures, and VIX exchange‐traded products (ETPs). I investigate a model that summarizes the VIX futures term structure using latent factors (level, slope, and curvature) and expand it with the VIX and VIX futures demand stemming from VIX ETPs. I find evidence of VIX ETPs impacting the VIX futures term structure, but no evidence of any impacts on the VIX.

The challenges of oil investing: Contango and the financialization of commodities

The ability of oil investment vehicles to perfectly track spot oil has always been challenging; however, recently many vehicles have underperformed spot oil. We study the behavior of oil futures and exchange-traded products that invest in oil futures to document and understand the source of this tracking error. The primary reason why oil investment vehicles have underperformed spot oil is an increase in contango in oil futures markets that we find might be related to investment crowding and the financialization of commodity markets. We show that from 2006 to 2017, oil futures investing underperformed spot oil and the market was in contango most of the time. Proxies for crowding, such as the concentration of major oil investors and changes in assets under management and fund flows of major oil exchange-traded products, are associated with contango in the futures markets and the divergence between futures and spot returns. We also provide evidence of an impact of the financialization on oil futures prices.

Volmageddon and the Failure of Short Volatility Products

The rapid growth of exchange-traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on 5 February 2018. In this article, we describe this “Volmageddon” event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.

Investment Performance of ETPs Related to Crude Oil

The unprecedented COVID-19 pandemic at the beginning of 2020 jeopardized the entire world. Meanwhile, the Russia–Saudi Arabia oil war led a crude oil market going out of the frying pan into the fire. This research has two main purposes. First, we investigate structures of the crude oil related exchange-traded products (ETPs) in terms of operation and cost. Second, we analyze the correlation and investment performance of the crude oil related ETPs and West Texas Intermediate spot market. The major findings are as follows: (1) there is a positive correlation between the crude oil spot and the crude oil producing firm, (2) the investment performance of the crude oil related ETPs is inferior to that of the crude oil spot due to the rollover cost, (3) the investment performance of the crude oil related leverage ETNs (Exchange-Traded Notes) or inverse ETPs has deteriorated because their managing structure tracks the daily return which leads to the compounding effects. These empirical results show the characteristics of the gain and loss of the crude oil-related ETPs, which enhance conceptual understanding and offer implications to policymakers and authorities for the efficiency of the alternative investment strategy.

Investment Performance of ETPs Related to Crude Oil

The unprecedented COVID-19 pandemic at the beginning of 2020 jeopardized the entire world. Meanwhile, the Russia–Saudi Arabia oil war led a crude oil market going out of the frying pan into the fire. This research has two main purposes. First, we investigate structures of the crude oil related exchange-traded products (ETPs) in terms of operation and cost. Second, we analyze the correlation and investment performance of the crude oil related ETPs and West Texas Intermediate spot market. The major findings are as follows: (1) there is a positive correlation between the crude oil spot and the crude oil producing firm, (2) the investment performance of the crude oil related ETPs is inferior to that of the crude oil spot due to the rollover cost, (3) the investment performance of the crude oil related leverage ETNs (Exchange-Traded Notes) or inverse ETPs has deteriorated because their managing structure tracks the daily return which leads to the compounding effects. These empirical results show the characteristics of the gain and loss of the crude oil-related ETPs, which enhance conceptual understanding and offer implications to policymakers and authorities for the efficiency of the alternative investment strategy.

Monthly-rebalanced leveraged exchange-traded products: Performance and mandatory rebalancing needs

This paper examines the performance of monthly-rebalanced Leveraged Exchange-Traded Products (LETPs), and compares the performance and mandatory rebalancing needs between monthly-rebalanced LETPs and daily-rebalanced LETPs. We find that our sample monthly-rebalanced LETPs can approximately deliver their stated multiples. The monthly-rebalanced LETPs still suffer from compounding effect when holding period is multiple months, but this effect is mitigated relative to daily-rebalanced LETPs. Investors can gain a predictable return multiple different from the stated multiple by purchasing monthly-rebalanced LETPs at a non-rebalancing time. Even after controlling for the underlying index, holding period, and target return multiple, the performance and risks of monthly-rebalanced LETPs are much different from those of daily-rebalanced LETPs. In addition, the monthly LETPs generally require more mandatory rebalancing than the daily ones. These findings can help investors, practitioners, and regulators better understand the performance behaviors and potential consequences of monthly-rebalanced LETPs.

Volmageddon and the Failure of Short Volatility Products

The rapid growth of exchange traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on February 5th 2018. In this paper, we describe this “Volmageddon” event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.

Misaligned Incentives in Markets: Envisioning Finance That Benefits All of Society

The modern financial system is plagued by misaligned incentives that allow some firms to extract distributive profits, and direct wealth transfers in their favor, without producing anything of value, or improving society with enhanced employment or socially useful innovation. Many modern financial products and activities serve no underlying economic or productive purpose. The system is creating market intermediaries of astounding size, power, profitability, and economic and regulatory policy influence. Some financial firms expressly profit from heightened interconnection and complexity, while others benefit directly from increased volatility. Yet we all bear the costs of this evolved financial system when it unravels due to its interconnectedness with the real economy, and our increased reliance on markets. This article advocates for a financial system that is de-financialized, de-complexified, more transparent, and better orientated to productive ends in a way that benefits all of society, not just the firms who reap asymmetrical payoffs in a complex system, intermediate capital, create financial products, or run the plumbing in a system that ultimately serves them best.This article gives support to Hyman Minsky’s “money manager capitalism” hypothesis by showing how the financial system has evolved since the 2008 crisis because of misaligned incentives. In support of this contention the article profiles numerous post-crisis trends and events in financial markets where misaligned incentives emerge, including moral hazard in debt origination, how some financial firms benefit from volatility; the real winners of the Game Stop “meme stock” saga; problems from price dislocations in credit exchange traded funds (ETFs) during the coronavirus pandemic crash; conflicts in the construction and composition of indices; market disruption from volatility-linked exchange traded products (ETPs); misaligned incentives in special purpose acquisition companies (SPACs) and evolved private equity (PE) business models; fragilities in pension administration; environmental, social, governance (ESG) opacity and greenwashing in investment funds; and governance conflicts from economic and proxy voting power of mega-asset managers.

Trading leveraged Exchange-Traded products is hazardous to your wealth

Using a large set of both trading and survey data, we sketch the profile of the typical retail investor who trades Leveraged Exchange-Traded Products (LETPs). Our findings show that the typical user of LETPs looks like an overconfident gambler willing to take a high risk, though some highly loss averse investors use inverse leveraged Exchange-Traded Products (ILETPs) for hedging purposes. Aggregating holdings in both stocks and Exchange-Traded Products (ETPs), users of LETPs get a lower performance than retail investors who invest in vanilla ETPs (VETPs). The reason is twofold: they trade too much and hurt their returns when investing in LETPs. Though trading LETPs could be interpreted as rational gambling, the skewness of the monthly portfolio returns of LETP users does not offset the risk-return sacrifice in the mean-variance space.

Are Exchange-Traded Notes Predictable? An Empirical Investigation of Commodity ETNs

Exchange-traded notes (ETNs) are exchange-traded products similar to exchange-traded funds that track performances of some market indices. ETNs are traded throughout the trading hours on organized exchanges such as the New York Stock Exchange. In this article, the author studies a sample of ETNs issued by Barclays Bank PLC that tracks commodity futures indices. Using daily data spanning over the past 10 years up to 2018, the author investigates the relationship between premiums and returns for a sample of ETNs issued. Within a panel vector autoregression framework, the author tested several hypotheses to uncover the link between premiums and returns. The hypotheses focus on noise trading and return predictability and their impact on the informational efficiency in the ETN markets. <b>TOPICS:</b>Exchange-traded funds and applications, commodities, futures and forward contracts, performance measurement <b>Key Findings</b> ▪ There are noise traders in the ETN market. These uninformed traders surge market volume and liquidity but diminish the ability of the market to respond to new information. ▪ ETN premiums consistently and significantly predict future premiums. The results recommend that premiums might reflect some unique information about future ETN returns. ▪ The ETN market is not efficient, and tracking premiums might help investors to predict future ETN returns.