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the details of the fund’s construction


Please give this work on Tuesday, March 21st, by 10 PM.

Questions about VXX Exchange Traded Notes

Please visit the website;instrumentId=341408 and familiarize yourself with the Barclays iPath VIX Futures exchange-traded note (ETN), which trades under the symbol VXX. The site includes links to pdf files containing complete documentation. You will need to read at least some of the prospectus to understand the details of the fund’s construction.

You can get the ETN history from A minor detail is that the original VXX contract traded from January 2009 through January 2019, when it matured. In January 2018, Barclays created a second one that traded under the symbol VXXB. In April 2019 they switched its symbol to VXX. On the Canvas site, there is another Yahoo spreadsheet for the original note. You should paste the two data series together (adjusting for splits), and treat it as single security from 2009 until now.

Prepare a report assessing the risk and reward characteristics of this instrument. In particular, your report should address the following four questions.

� Question 1. Briefly summarize how the ETN works. What does Barclays do with the money in the fund? Is the fund levered? Is there an arbitrage relationship that links the market value of VXX to the level of the VIX index?

� Question 2. Plot the cumulative returns to date on VXX. From the available historical data, provide an estimate of the market price of VXX risk.1 Make sure to annualize the numerator and denominator appropriately.

We can view this as an estimate of the market price of VIX risk if the two series are tightly linked.2 What is the correlation between daily VXX returns and the daily changes of the (log) VIX index?

� Question 3. Under the type of stochastic volatility model we have been using, it is not hard to show that the market price of VIX risk is the same as the market price of actual S&P 500 volatility risk. So we can interpret your VXX risk price estimates as that quantity as well. The next topic to investigate is whether there is any evidence for predictable changes in this price of volatility risk. This is equivalent to asking whether there are any good timing strategies for trading VXX.

Bin the data by calendar quarter, and re-estimate the VXX Sharpe ratio in each quarter. Plot the time-series. Do you see evidence of any patterns in the changes, or does it look like noise? Is there any statistical evidence that the price of volatility risk itself is associated with

1For an overnight riskless rate, you can use the Federal Funds rate, available from https://fred.stlouisfed. org/series/EFFR.

2Data on VIX can be downloaded from



the level of VIX at the start of the quarter, or with the return on the S&P 500 index3 over the previous quarter?

� Question 4. Under the ordinary Capital Asset Pricing Model, the market price of any source of risk X is simply the correlation of changes in X with the returns to the market, times the price of stock market risk. What is your estimate of that price of risk using data since 2009.

Estimate the contemporaneous correlation between VXX returns and returns on the S&P 500. Evaluate the assertion that the Sharpe ratio we observe in VXX is simply explained by its CAPM exposure. How do you interpret your conclusion?

3You can use the returns on the SPY ETF (also from Yahoo finance) as a good approximation to the S&P 500 returns.