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Title: Volatility-related exchange traded assets: an econometric investigation

Author(s): Javier Mencía and Enrique Sentana

Publication Date: March 2015

Keyword(s): Density Expansions, Exchange Traded Notes, Multiplicative Error Model and Volatility Index Futures

Programme Area(s): Financial Economics

Abstract: We compare Semi-Nonparametric expansions of the Gamma distribution with alternative Laguerre expansions, showing that they substantially widen the range of feasible moments of positive random variables. Then, we combine those expansions with a component version of the Multiplicative Error Model to capture the mean reversion typical in positive but stationary financial time series. Finally, we carry out an empirical application in which we compare various asset allocation strategies for Exchange Traded Notes tracking VIX futures indices, which are increasingly popular but risky financial instruments. We show the superior performance of the strategies based on our econometric model.

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Bibliographic Reference

Mencía, J and Sentana, E. 2015. 'Volatility-related exchange traded assets: an econometric investigation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10444