PT  - JOURNAL ARTICLE
AU  - Carol Alexander
AU  - Dimitris Korovilas
TI  - Volatility Exchange-Traded Notes:<br/>
               <em>Curse or Cure?</em>
AID  - 10.3905/jai.2013.16.2.052
DP  - 2013 Sep 30
TA  - The Journal of Alternative Investments
PG  - 52--70
VI  - 16
IP  - 2
4099  - https://pm-research.com/content/16/2/52.short
4100  - https://pm-research.com/content/16/2/52.full
AB  - 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