Effects of nondiscretionary trading on futures prices

This paper examines the effects of the nondiscretionary trading demands of VIX exchangetradedproducts (ETPs) issuers on the prices and volumes in the VIX futures. We find thatthe ETPs’ information-less, mechanical rebalancing of futures positions to maintain theconstant maturity of the index and the promised leverage ratios of the VIX ETPs havesignificantly positive predictive power for end-of-day futures returns. We also show thatthe impact on price has diminished through time as a result of the increased liquidityprovided by hedge funds, and the “natural” hedging of the issuers’ inverse products