Does Historical Volatility Term Structure Contain Valuable Information for Predicting Volatility and Index Futures?

25 Pages Posted: 29 Sep 2014  

Juliusz Jablecki

University of Warsaw - Faculty of Economic Sciences; National Bank of Poland

Ryszard Kokoszczynski

Warsaw University - Dept. of Economics; National Bank of Poland

Pawel Sakowski

University of Warsaw

Robert Slepaczuk

University of Warsaw - Faculty of Economic Sciences

Piotr Wojcik

University of Warsaw - Faculty of Economic Sciences

Date Written: September 25, 2014

Abstract

We suggest that the term structure of volatility futures (e.g. VIX futures) shows a clear pattern of dependence on the current level of VIX index. At the low level of VIX (below 20) the term structure is highly upward sloping; at the high VIX level (over 30) it is strongly downward sloping. We use those features to better predict future volatility and index futures. We begin by introducing some quantitative measures of volatility term structure (VTS) and volatility risk premium (VRP). We use them further to estimate the distance between the actual value and the fair (model) value of the VTS. We find that this distance has significant predictive power for volatility futures and index futures and we use this feature to design a simple strategy to invest in VIX index futures and S&P500.

Keywords: volatility term structure, volatility risk premium, volatility and index futures, realized volatility

JEL Classification: G11, G14, G15, G23, C61, C22

Suggested Citation

Jablecki, Juliusz and Kokoszczynski, Ryszard and Sakowski, Pawel and Slepaczuk, Robert and Wojcik, Piotr, Does Historical Volatility Term Structure Contain Valuable Information for Predicting Volatility and Index Futures? (September 25, 2014). Available at SSRN: https://ssrn.com/abstract=2501747 or http://dx.doi.org/10.2139/ssrn.2501747

Juliusz Jablecki

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

National Bank of Poland ( email )

Warsaw
Poland

Ryszard Kokoszczynski (Contact Author)

Warsaw University - Dept. of Economics ( email )

Warsaw, 00-241
Poland
(4822)8314725 (Phone)
(4822)8314752 (Fax)

National Bank of Poland ( email )

Warsaw
Poland
(4822)5854381 (Phone)
(4822)5854374 (Fax)

Pawel Sakowski

University of Warsaw ( email )

Krakowskie Przedmiescie 26/28
Warszawa, Pl-00681
Poland

Robert Slepaczuk

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

Piotr Wojcik

University of Warsaw - Faculty of Economic Sciences ( email )

Dluga Street 44/50
Warsaw, 00-241
Poland

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