Besides stocks, bonds, cash, commodities or real estate, volatility emerged as its own asset class in recent years. The last major financial crisis and increasing market volatility raised this topic to a new level. Studies have shown that volatility tends to be negatively correlated to stock market returns. In other words, when stock markets plunge, volatility tends to increase and vice versa. The development of the global financial markets and the introduction of Exchange Traded Products (ETPs) opened the markets to a wide range of investors, even to non-professional investors. The increasing interest in volatility-linked products led ETP issuers to the introduction of volatility-related products.
Volatility ETPs seek to track a specific index - in many cases sub-indices - that track the performance of the Chicago Board Options Exchange Volatility Index (VIX) while providing all the advantages of a globally traded ETP such as highly liquid markets, market makers all over the world, tight spreads, low costs and assets hold as security funds.
These advantages, compared to other volatility strategies via options or listed warrants, make volatility ETPs a very attractive tool for portfolio managers.
The aim of this paper is to introduce the reader to the topic of volatility as an asset class respectively to volatility ETPs, their construction, price behavior and characteristics. What is more, since the vast majority of research, dealing with volatility hedging, focuses on option- or futures-based strategies, there has not been done much research on the hedging efficiency and effectiveness of volatility linked ETPs as hedging instruments yet.
The analyzed question is therefore: “How efficient are volatility hedges through volatility-linked ETPs, compared to hedges through the VIX?”
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Main Part
- Volatility Basics
- Types of Volatility
- Historical Volatility
- Implied Volatility
- Types of Volatility
- The Chicago Board Options Exchange (CBOE) Volatility Index (VIX)
- Volatility Related Financial Instruments
- Case Study - Implementation of Volatility ETPs for Volatility Hedging
- VBA Solution for Volatility ETP Analyses
- Volatility Basics
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This bachelor thesis aims to analyze the application of volatility-related exchange-traded products (ETPs) as instruments for volatility hedging. It investigates different types of volatility, explores the Chicago Board Options Exchange Volatility Index (VIX) and its dynamics, and examines various volatility-related financial instruments. The study culminates in a case study implementing volatility ETPs for hedging purposes and the development of a VBA solution for analyzing these instruments.
- Different types of volatility (historical and implied)
- The characteristics and dynamics of the VIX
- Volatility-related financial instruments and their applications
- Implementation of volatility ETPs for hedging strategies
- Development and application of a VBA tool for volatility ETP analysis
Zusammenfassung der Kapitel (Chapter Summaries)
Introduction: This chapter likely provides background information on volatility and its significance in financial markets, setting the stage for the in-depth analysis of volatility-related ETPs in subsequent chapters. It probably introduces the central research question and outlines the thesis's structure and methodology. The introduction likely highlights the importance of effective volatility hedging strategies for investors and the potential role of ETPs in achieving this goal.
Volatility Basics: This chapter delves into the fundamental concepts of volatility, differentiating between historical and implied volatility. It likely explores various methods for calculating historical volatility, including the use of standard deviation and the analysis of time series data for stationarity, kurtosis, and skewness. The chapter probably discusses implied volatility derived from option prices using models like the Black-Scholes model, including its assumptions, limitations (such as volatility smiles), and potential modifications. The relative explanatory power of historical versus implied volatility is likely compared and contrasted.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX): This section likely provides a comprehensive overview of the VIX, including its history, calculation methodology, and importance as a market indicator of expected volatility. The analysis probably explores VIX futures and options, examines the VIX's dynamics (correlation with the S&P 500, volatility of volatility, volume-volatility relationships, and distribution characteristics), and potentially discusses the asymmetric volatility phenomenon. The chapter likely aims to establish the VIX as a crucial benchmark for understanding and managing volatility risk.
Volatility Related Financial Instruments: This chapter likely details various financial instruments used for volatility trading and hedging. It would probably cover options-based strategies (such as butterfly spreads and straddles), variance swaps, and, most importantly, volatility-related ETPs. The chapter would likely provide an overview of the structure and characteristics of different ETPs, analyzing their suitability for different hedging strategies. The discussion would likely differentiate between ETNs and ETFs in the context of volatility trading.
Case Study - Implementation of Volatility ETPs for Volatility Hedging: This chapter presents a detailed case study demonstrating the practical application of volatility ETPs for hedging purposes. It probably outlines the study's construction, methodology, and data used. The chapter would likely involve an analysis of spreads, liquidity, and costs associated with different ETPs. Furthermore, it would probably examine the performance of specific VIX ETPs (e.g., VXX) in relation to the VIX futures term structure, considering the impact of contango and backwardation. A crucial component would be an analysis of hedge efficiency, including the consideration of correlation dynamics and possibly employing regression analysis to assess the effectiveness of the hedging strategies. The chapter likely concludes with an analysis of the overall portfolio impact of incorporating VXX/VIX portions, potentially including optimization strategies.
VBA Solution for Volatility ETP Analyses: This chapter describes a VBA solution developed for analyzing volatility ETPs. It likely details the tool's aim, implementation, user guide, and potential drawbacks. It probably discusses possible avenues for future development and enhancements of the VBA tool.
Schlüsselwörter (Keywords)
Volatility, Volatility Hedging, Exchange Traded Products (ETPs), Exchange Traded Notes (ETNs), Exchange Traded Funds (ETFs), Volatility Index (VIX), Historical Volatility, Implied Volatility, Black-Scholes Model, Options, Hedging Strategies, Contango, Backwardation, Variance Swaps, VBA, Risk Management, Financial Markets.
Frequently Asked Questions: Comprehensive Language Preview on Volatility Hedging using ETPs
What is the main focus of this bachelor thesis?
This bachelor thesis analyzes the application of volatility-related exchange-traded products (ETPs) as instruments for volatility hedging. It investigates various aspects of volatility, explores the VIX index, examines volatility-related financial instruments, and includes a case study implementing volatility ETPs for hedging, along with a developed VBA solution for analysis.
What types of volatility are discussed?
The thesis differentiates between historical volatility (calculated using methods like standard deviation and time series analysis) and implied volatility (derived from option prices using models like Black-Scholes). It compares and contrasts their relative explanatory power.
What is the role of the VIX index in the thesis?
The Chicago Board Options Exchange Volatility Index (VIX) is analyzed comprehensively, covering its calculation, dynamics (correlation with the S&P 500, volatility of volatility), and its importance as a market indicator of expected volatility. VIX futures and options are also discussed.
What financial instruments are examined besides ETPs?
Besides ETPs, the thesis explores various financial instruments used for volatility trading and hedging, such as options-based strategies (butterfly spreads, straddles), and variance swaps. The differences between ETNs and ETFs in the context of volatility trading are also highlighted.
What is the nature of the case study?
The case study demonstrates the practical application of volatility ETPs for hedging. It analyzes spreads, liquidity, and costs associated with different ETPs, examines the performance of specific VIX ETPs (e.g., VXX) in relation to the VIX futures term structure (considering contango and backwardation), and assesses hedge efficiency using regression analysis. Portfolio impact and optimization strategies are also discussed.
What is the VBA solution and its purpose?
A VBA solution is developed for analyzing volatility ETPs. The thesis details the tool's aim, implementation, user guide, and potential drawbacks, along with suggestions for future enhancements.
What are the key themes explored in the thesis?
Key themes include different types of volatility, the characteristics and dynamics of the VIX, volatility-related financial instruments, the implementation of volatility ETPs for hedging, and the development and application of a VBA tool for analysis.
What are the key words associated with this thesis?
Key words include: Volatility, Volatility Hedging, Exchange Traded Products (ETPs), Exchange Traded Notes (ETNs), Exchange Traded Funds (ETFs), Volatility Index (VIX), Historical Volatility, Implied Volatility, Black-Scholes Model, Options, Hedging Strategies, Contango, Backwardation, Variance Swaps, VBA, Risk Management, Financial Markets.
What is the overall objective of the thesis?
The overall objective is to provide a thorough analysis of using volatility-related ETPs for effective volatility hedging strategies in financial markets.
What chapters are included in the thesis?
The thesis includes chapters on: Introduction, Volatility Basics, The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), Volatility Related Financial Instruments, Case Study - Implementation of Volatility ETPs for Volatility Hedging, and VBA Solution for Volatility ETP Analyses.
- Quote paper
- Lennart Berning (Author), 2016, The Application of Volatility related Exchange Traded Products as Instruments for Volatility Hedging, Munich, GRIN Verlag, https://www.grin.com/document/321873