JBAFP 2019, 1(1); doi: 10.26870/jbafp.2018.01.004
WHEN GAMBLING IS NOT WINNING: EXPLORING OPTIMALITY OF VIX TRADING UNDER THE EXPECTED UTILITY THEORY
Received: 26 Aug 2019 / Published: 2019-08-26
Recently, financial innovations have given rise to complex derivatives within the asset management industry. Although traditional assets pay dividends or coupons, vIX futures contracts have been partly misunderstood by unsophisticated investors, as they only provide portfolio insurance against stock market crashes. Therefore, over the calmer period 2009-2014, the most traded vIX futures exchange-traded product lost practically all of its value, ruining unexperienced investors. hence, this paper investigates appropriateness of these complex derivatives with investor's risk aversion. We address portfolio-choice optimality under uncertainty, for overlay allocations composed of equities, bonds, and vIX futures. This paper proposes a non-trivial solution based on the expected utility theory to simulate investor's behavior with risk aversion. Furthermore, it derives an investor's surprise metric defined as a welfare criterion measure, and a modelimplied risk premium defined as the insurance premium investor pays ex post to hedge. Empirical results show investing in vIX futures significantly beats traditionally diversified portfolios, but they turn to be particularly inappropriate for risk-loving investors. From the asset management perspective, this paper has practical implications since it recommends pedagogical efforts to raise investors' awareness of overlay strategies.
Keywords: vIX futures; expected utility theory; resampling; portfolioallocation; performance measures; investor expectations; model-implied risk premium
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
Al Wakil, A. WHEN GAMBLING IS NOT WINNING: EXPLORING OPTIMALITY OF VIX TRADING UNDER THE EXPECTED UTILITY THEORY. JBAFP 2019, 1, 0.
Al Wakil A. WHEN GAMBLING IS NOT WINNING: EXPLORING OPTIMALITY OF VIX TRADING UNDER THE EXPECTED UTILITY THEORY. Journal of Business Accounting and Finance Perspectives. 2019; 1(1):0.
Al Wakil, Anmar. 2019. "WHEN GAMBLING IS NOT WINNING: EXPLORING OPTIMALITY OF VIX TRADING UNDER THE EXPECTED UTILITY THEORY." JBAFP 1, no. 1: 0.