The VIX Futures Basis: Evidence and Trading Strategies
David P. Simon
Bentley University - Department of Finance
University of Massachusetts Amherst - Isenberg School of Management
June 27, 2012
This study demonstrates that the VIX futures basis does not have significant forecast power for the change in the VIX spot index from 2006 through 2011 but does have forecast power for subsequent VIX futures returns. The study then demonstrates the profitability of shorting VIX futures contracts when the basis is in contango and buying VIX futures contracts when the basis is in backwardation with the market exposure of these positions hedged with mini-S&P 500 futures positions. The results indicate that these trading strategies are highly profitable and robust to transaction costs, out of sample hedge ratio forecasts and risk management rules. Overall, the analysis supports the view that the VIX futures basis does not accurately reflect the mean-reverting properties of the VIX spot index but rather reflects a risk premium that can be harvested.
Keywords: Vix futures, trading strategies, term structure
JEL Classification: G13, G12
Date posted: June 28, 2012
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