The VIX Premium

Cheng, Ing-Haw

doi:10.2139/ssrn.2495414

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The VIX Premium

Review of Financial Studies, Forthcoming

57 Pages Posted: 13 Sep 2014 Last revised: 7 Jun 2018

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

University of Toronto - Rotman School of Management

Date Written: May 15, 2018

Abstract

Ex-ante estimates of the volatility premium embedded in VIX futures, known as the VIX premium, fall or stay flat when ex-ante measures of risk rise. This is not an artifact of mismeasurement: 1) Ex-ante premiums reliably predict ex-post returns to VIX futures with a coefficient near one, and 2) Falling ex-ante premiums predict increasing ex-post market and investment risk, creating profitable trading opportunities. Falling hedging demand helps explain this behavior, as premiums and trader exposures tend to fall together when risk rises. These facts provide a puzzle for theories of why investors hedge volatility.

Keywords: VIX, volatility, variance risk premium

JEL Classification: G11, G12, G13

Suggested Citation: Suggested Citation

Cheng, Ing-Haw, The VIX Premium (May 15, 2018). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2495414 or http://dx.doi.org/10.2139/ssrn.2495414