Does Historical Volatility Term Structure Contain Valuable Information for Predicting Volatility and Index Futures?
25 Pages Posted: 29 Sep 2014
Date Written: September 25, 2014
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: Suggested Citation