The VIX Futures Basis: Evidence and Trading Strategies

Posted: 28 Jun 2012  

David P. Simon

Bentley University - Department of Finance

Jim Campasano

University of Massachusetts Amherst - Isenberg School of Management

Date Written: June 27, 2012

Abstract

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

Suggested Citation

Simon, David P. and Campasano, Jim, The VIX Futures Basis: Evidence and Trading Strategies (June 27, 2012). Available at SSRN: https://ssrn.com/abstract=2094510 or http://dx.doi.org/10.2139/ssrn.2094510

David P. Simon (Contact Author)

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States
781-891-2489 (Phone)
781-891-2896 (Fax)

Jim Campasano

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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