@article {Alexander52, author = {Carol Alexander and Dimitris Korovilas}, title = {Volatility Exchange-Traded Notes: Curse or Cure? }, volume = {16}, number = {2}, pages = {52--70}, year = {2013}, doi = {10.3905/jai.2013.16.2.052}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This is the first comprehensive study of VIX futures ETNs. This empirical research into their statistical characteristics motivates the development of a sub-class of these notes based on static and dynamic differential roll-yield trades. Results show that such notes provide very attractive risk and return characteristics, plus a new source of diversification for non-speculative investors. Moreover, scenario analysis demonstrates that banks may control ETN issues so that profits are virtually guaranteed net of hedging costs. However, there is a dark side to ETNs currently in issue, which stems from a few sub-optimal terms and conditions concerning early redemption values. These conditions underpin: i) the speculative front-running of hedging activity, which has very negative consequences for issuers; ii) a moral hazard problem, which is induced by the one-day notice period for early redemption, and iii) large-scale spill-over activity to VIX futures trading, which is a potential new source of systemic risk.TOPICS: Exchange-traded funds and applications, futures and forward contracts, performance measurement}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/16/2/52}, eprint = {https://jai.pm-research.com/content/16/2/52.full.pdf}, journal = {The Journal of Alternative Investments} }