Document Type



Master of Science


Industrial Engineering

First Adviser

Thiele, Aurelie C.


The purpose of this thesis is to investigate the benefits of allocating part of a portfolio to exchange-traded products (ETPs) based on the Chicago Board Options Exchange's Volatility Index (VIX). Due to the highly negative correlation of the VIX to the S&P 500, many professionals and academics have researched the VIX and VIX related products over the last ten years. Dash and Moran (2005) set up an original framework of incorporating the VIX spot into hedge fund portfolios. They looked at three different portfolios, one having no allocation to the VIX spot, one having a constant 5% allocation to the VIX spot, and one having a 0-10% tactical allocation to the VIX spot depending on its movement in the previous month. This methodology has been replicated for VIX futures and VIX options, but not yet for VIX ETPs. This thesis extends the original Dash and Moran framework by allocating two different VIX exchange traded products, the iPath S&P 500 VIX Short-Term Futures ETN (ticker: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (ticker: VXZ) to an equity portfolio represented by the SPDR S&P 500 ETF (ticker: SPY) and a bond portfolio represented by the iShares Core Total U.S. Bond Market ETF (ticker: AGG) respectively. Moreover, I expand upon the original model by implementing optimization and two additional metrics, the reciprocal of the coefficient of variation (ICV), and the reciprocal of the downside coefficient of variation (DICV). Furthermore, I compare the results of the two VIX ETPs to that of another negatively correlated asset over the period, U.S. Treasury securities. For these securities, I chose the iShares 10-20 Year Treasury ETF (ticker: TLH) and the iShares 20+ Year Treasury Bond ETF (ticker: TLT). Over the entire period from February 27, 2009 to March 1, 2013, investing in VIX ETPs would have been beneficial with respect to risk-adjusted returns for only certain sub periods and of the two VIX ETPs, VXZ was the more likely one to result in a benefit to risk-adjusted portfolio returns. However, a static allocation to either ETP over this period would have reduced risk-adjusted portfolio returns far more often than it would have increased them. In comparison to the two Treasury ETFs over this period, static allocations to VXZ outperformed TLT, but grossly underperformed TLT. In conclusion, this thesis finds that, in general, VIX ETPs are beneficial only during specific time periods and that a static allocation to a VIX exchange-traded product is more detrimental than beneficial. Therefore, extensions of this thesis should attempt to develop a tactical allocation scheme in order to take advantage of the negative correlations of the VIX exchange-traded products, without subjecting the portfolio to its relatively high probability of negative returns and large volatility.

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