Nature of VIX Jumps on Market Timing of Hedge Funds

58 Pages Posted: 23 Aug 2011 Last revised: 13 Nov 2013

See all articles by Yueh-Neng Lin

Yueh-Neng Lin

National Chung Hsing University

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business

Date Written: June 20, 2012

Abstract

The study indicates that Brownian motion, finite and infinite activity jumps are present in the ultra-high frequency VIX data. The total quadratic variation can be split into a continuous component of 29% and a jump component of 71%. Jump activities on ultra-high frequency VIX data are found informative in ex-ante identifying subgroups of hedge funds that deliver significant outperformance. In the months that follow large jumps, strategies exposing to long volatility and extreme risk tend to deliver positive performance in extreme market environments. In the months that follow small jumps, possibly as a result of trading illiquidity, most fund strategies exhibit losses in the jolting market environments. In the months that follow Brownian motion, strategies exposing to short volatility tend to deliver best performance. Hedge funds therefore deliver out-of-sample performance respective of types of jump activities on ultra-high frequency VIX.

Keywords: Ultra-high frequency VIX, Infinite jump activity, Finite jump activity, Brownian motion, Hedge fund strategies

JEL Classification: G12, G13, G14

Suggested Citation

Lin, Yueh-Neng and Goh, Jeremy, Nature of VIX Jumps on Market Timing of Hedge Funds (June 20, 2012). Available at SSRN: https://ssrn.com/abstract=1914452 or http://dx.doi.org/10.2139/ssrn.1914452

Yueh-Neng Lin

National Chung Hsing University ( email )

402, No. 250 Kuo Kuang Road, Taiwan
Taichung, Taiwan
China

Jeremy Goh (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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