The Relationship Between VIX Futures Term Structure and S&P500 Returns
The Relationship Between VIX Futures Term Structure and S&P500 Returns

Author: Athanasios Fassas

Publisher:

Published: 2016

Total Pages: 19

ISBN-13:

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The current paper tests and documents the relationship between the term structure of VIX futures and the underlying equity returns. Furthermore, it investigates the signaling effects of VIX futures term structure in respect to future stock index movements. The objective of this empirical analysis is to verify if a steep upward-sloping term structure indicates a late phase of a bullish trend and conversely if an extreme negative term structure suggests an over-sold market, as certain market participants believe.The empirical findings of this study suggest that there is a strong statistical significant positive contemporaneous relationship between the changes in the VIX futures term structure and the returns of the underlying equity index. Finally, the econometric analysis lends some support to the hypothesis that the term structure of VIX futures can be used as a contrarian indicator for investing in the equity market.

A Note of Trading the Term Structure of VIX Futures
A Note of Trading the Term Structure of VIX Futures

Author: Anusar Farooqui

Publisher:

Published: 2020

Total Pages: 11

ISBN-13:

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The term structure of VIX futures contains a very strong signal of dealer risk appetite. Unlike balance sheet quantities, this feature is available at very high frequencies. Here we exhibit two systematic strategies to mine the attendant risk premium from the term structure of expected volatility. We optimize our two hyper-parameters by OOS cross-validation. We compare our strategies to holding the S&P 500, selling short-term vol un-hedged, and a portfolio that sells short-term vol and hedges by going long on medium-term vol. We find that our strategies allow us to harvest a considerable portion of the risk premium associated with the balance sheet management of market-based intermediaries. Both in-sample and OOS, the risk-adjusted returns on our strategies are at least twice as high as the three benchmarks.

The Information Content of the Implied Volatility Term Structure on Future Returns
The Information Content of the Implied Volatility Term Structure on Future Returns

Author: Yaw-Huei Wang

Publisher:

Published: 2017

Total Pages: 50

ISBN-13:

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We derive the theoretical relation between the term structure of implied variance and the expected excess returns of the underlying asset. Adopting three alternative approaches to compile the variables representing the information on the implied volatility index level and term structure, we show the important role of the term structure in determining future excess returns of the S&P 500 index. Both the in-sample and out-of-sample analyses suggest that the information content of the term structure variable is significant and a strong complement to that of the level variable, especially for shorter-term excess returns.

Risk Premia and the VIX Term Structure
Risk Premia and the VIX Term Structure

Author: Travis L. Johnson

Publisher:

Published: 2018

Total Pages: 50

ISBN-13:

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The shape of the VIX term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. A single principal component, Slope, summarizes nearly all this information, predicting the excess returns of S&P 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. Slope's predictability is incremental to other proxies for the conditional variance risk premia, is economically significant, and can only partially be explained by variations in observable risk measures.

The Causal Relationship between the S&P 500 and the VIX Index
The Causal Relationship between the S&P 500 and the VIX Index

Author: Florian Auinger

Publisher: Springer

Published: 2015-02-13

Total Pages: 102

ISBN-13: 3658089695

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Florian Auinger highlights the core weaknesses and sources of criticism regarding the VIX Index as an indicator for the future development of financial market volatility. Furthermore, it is proven that there is no statistically significant causal relationship between the VIX and the S&P 500. As a consequence, the forecastability is not given in both directions. Obviously, there must be at least one additional variable that has a strong influence on market volatility such as emotions which, according to financial market experts, are considered to play a more and more important role in investment decisions.

Directional Exposure to Volatility via Listed Futures S&P 500 VIX Short-Term Futures Index
Directional Exposure to Volatility via Listed Futures S&P 500 VIX Short-Term Futures Index

Author: Global Research & Design S&P Dow Jones Indices

Publisher:

Published: 2009

Total Pages: 9

ISBN-13:

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Volatility has emerged as an important asset class in the last decade. It is actively traded through over-the counter swaps, and more recently through exchange listed VIX futures and options. While VIX has achieved widespread recognition, it remains very challenging to replicate spot VIX. The Samp;P 500 VIX Short-Term Futures Index is the first index to offer replicable, directional exposure to volatility using exchange-listed futures contracts. The index is comprised of two near term VIX futures contracts, which are rebalanced daily in equal increments in order to maintain a constant one month maturity. While the correlation between spot VIX and the Samp;P 500 VIX Short-Term Futures Index is not perfect, it is a healthy 87%. More importantly, the correlation of the index to the Samp;P 500 is -76%, similar to the correlation of spot VIX to the Samp;P 500 of -74%. The index has a positive return 95% of the time that the Samp;P 500 has a loss of more than 1%. During days of sharp market declines, index returns are usually greater in value than corresponding Samp;P 500 losses. Dedicated long positions in the index are expected to decline during normal volatility regimes. Not only is volatility mean reverting to a theoretical expected long term return of zero, but the index is also expected to suffer from roll loss due to term structure decay. Conversely, short positions in the index provide exposure to a forward starting volatility arbitrage strategy.

The VIX Index and Volatility-Based Global Indexes and Trading Instruments: A Guide to Investment and Trading Features
The VIX Index and Volatility-Based Global Indexes and Trading Instruments: A Guide to Investment and Trading Features

Author: Matthew T. Moran

Publisher: CFA Institute Research Foundation

Published: 2020-04-28

Total Pages: 49

ISBN-13: 1944960961

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During the past two decades, the Cboe Volatility Index (VIX® Index), a key measure of investor sentiment and 30-day future volatility expectations, has generated much investor attention because of its unique and powerful features. The introduction of VIX futures in 2004, VIX options in 2006, and other volatility-related trading instruments provided traders and investors access to exchange-traded vehicles for taking long and short exposures to expected S&P 500 Index volatility for a particular time frame. Certain VIX-related tradable products may provide benefits when used as tools for tail-risk hedging, diversification, risk management, or alpha generation. Gauges of expected stock market volatility for various regions include the VIX Index (United States), AXVI Index (Australia), VHSI Index (Hong Kong), NVIX Index (India) and VSTOXX Index (Europe). All five of these volatility indexes had negative correlations with their related stock indexes price movements, and all five volatility indexes rose more than 50% in 2008. Although the five volatility indexes are not investable, investors can explore VIX-based benchmark indexes that show the performance of hypothetical investment strategies using VIX futures or options. Before investing in volatility-related products, investors should closely study the pricing, roll cost, and volatility features of the tradable products and read the applicable prospectuses and risk disclosure statements.

Inferring Volatility Dynamics and Risk Premia from the S&P 500 and VIX Markets
Inferring Volatility Dynamics and Risk Premia from the S&P 500 and VIX Markets

Author: Chris Bardgett

Publisher:

Published: 2017

Total Pages: 69

ISBN-13:

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This paper shows that the VIX market contains information that is not already contained by the S&P 500 market on the variance of the S&P 500 returns. We estimate a flexible affine model based on a joint time series of underlying indexes and option prices on both markets. We find that including VIX option prices in the model estimation allows better identification of the parameters driving the risk-neutral conditional distributions and term structure of volatility, thereby enhancing the estimation of the variance risk premium. We gain new insights on the properties of the premium's term structure and show how they can be used to form trading signals. Finally, our premium has better predictive power than the usual model-free estimate and the higher-order moments of its term structure allow improving forecasts of S&P 500 returns.

Variance Term Structure and VIX Futures Pricing
Variance Term Structure and VIX Futures Pricing

Author: Yingzi Zhu

Publisher:

Published: 2005

Total Pages: 24

ISBN-13:

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Using no arbitrage principle, we derive a relationship between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance curve. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a no arbitrage pricing model for VIX futures pricing. The model is the first no arbitrage model combining options market and VIX futures market. The model can be easily generalized to price other volatility derivatives.

The Market for Volatility Trading; Vix Futures
The Market for Volatility Trading; Vix Futures

Author: Menachem Brenner

Publisher:

Published: 2008

Total Pages: 30

ISBN-13:

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This paper analyses the new market for trading volatility; VIX futures. We first use market data to establish the relationship between VIX futures prices and the index itself. We observe that VIX futures and VIX are highly correlated; the term structure of VIX futures price is upward sloping while the term structure of VIX futures volatility is downward sloping. To establish a theoretical relationship between VIX futures and VIX, we model the instantaneous variance using a simple square root mean-reverting process. Using daily calibrated variance parameters and VIX, the model gives good predictions of VIX futures prices. These parameter estimates could be used to price VIX options.