The Risks of Volatility ETNs: A Recent Incident and Underlying Issues

Felix Goltz, Stoyan Stoyanov: This study addresses Volatility ETNs following the Credit Suisse TVIX controversy of early 2012.

Author(s):

Felix Goltz

Head of Applied Research at EDHEC-Risk Institute.

Stoyan Stoyanov

Professor of Finance at EDHEC Business School and Head of Research at EDHEC Risk Institute–Asia.

Getting volatility exposure has become easier for investors after the relatively recent introduction of volatility ETNs (exchange-traded notes) and volatility ETFs (exchange-traded funds) and some of these products have enjoyed a surge in popularity. In this paper, we use the recent crisis with TVIX – a volatility ETN – to underline important differences between ETNs and ETFs which appear to be at the source of the observed market distortion. We also emphasize an important feature of these products – that they track constant maturity VIX futures indices rather than the VIX index itself – which has an impact on the quality of the volatility exposure because of the roll-over costs and the lack of cash-and-carry arbitrage relationship.

Type: EDHEC Publication
Date: le 25/09/2012
Research Cluster : Finance

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