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by 1024core 3049 days ago
ELI5: what is the correlation between $VXX and $XIV ?

Over the past 2 years, they moved in tandem but opposite directions. But when $XIV crashed, $VXX didn't go back to the corresponding price.

1 comments

The XIV is (was) meant to track the daily inverse of (roughly) the same underlying index as VXX. So a 10% up day for the index should be 10% up for VXX and 10% down for XIV. Now we can plug in rough approximations for Monday 2/5 and Tuesday 2/6.

The underlying index was up something like 90%. So VXX up 90% and XIV down 90%. Next day the index goes down 25% so VXX down 25% XIV up 25%. The two day returns for VXX will be 1.90 * .75 = 42% up and the two day returns for XIV will be 0.10 * 1.25 = 87.5% down. You can see how the daily tracking blows out the tracking over longer terms (just 2 days in this case). Since the VIX moves had been relatively small on a day to day basis, it sort of looked like they tracked each other on inverse terms over longer periods but it was just an illusion.