Global financial crisis, funding constraints, and liquidity of VIX futures

We explore the effect of funding constraints on the trading costs of VIX futures. With an increase in funding constraints during a crisis (non-crisis) period, we observe a corresponding increase (decrease) in the proportional effective spread, quoted spread, order cost, asymmetric information, and trade sizes. The leveraged traders play a possible channel in the relationship between funding constraints and trading costs. When leveraged traders face scarce capital during a crisis (non-crisis) period, they increase (decrease) their net long positions to increase (decrease) the hedging pressure that leads to an increase (decrease) in trading costs that decreases (increases) the liquidity.