Statistics of VIX Futures and Their Applications to Trading Volatility Exchange-Traded Products

The Journal of Investment Strategies, Vol. 7, No. 2, pp. 1-33 (2018)

39 Pages Posted: 31 Aug 2017 Last revised: 14 Nov 2018

See all articles by Marco Avellaneda

Marco Avellaneda

New York University (NYU) - Courant Institute of Mathematical Sciences; Finance Concepts LLC

Andrew Papanicolaou

NYU Tandon School of Engineering, Department of Finance and Risk Engineering

Date Written: February 24, 2018

Abstract

We study the dynamics of VIX futures and ETNs/ETFs. We find that contrary to classical commodities, VIX and VIX futures exhibit large volatility and skewness, consistent with the absence of cash-and-carry arbitrage. The constant-maturity futures (CMF) term-structure can be modeled as a stationary stochastic process in which the most likely state is a contango with VIX ≈ 12% and a long-term futures price V∞ ≈ 20%. We analyze the behavior of ETFs and ETNs based on constant-maturity rolling futures strategies, such as VXX, XIV and VXZ, assuming stationarity and through a multi-factor model calibrated to historical data. We find that buy-and-hold strategies consisting of shorting ETNs that roll long futures, or buying ETNs that roll short futures, will produce theoretically-sure profits if it is assumed that CMFs are stationary and ergodic (see Proposition 3.1). To quantify further, we estimate a 2-factor lognormal model with mean-reverting factors to VIX and CMF historical data from 2011 to 2016. The results confirm the profitability of buy-and-hold strategies, but also indicate that the latter have modest Sharpe ratios, of the order of SR = 0.5 or less, and high variability over 1-year horizon simulations. This is due to the surges in VIX and CMF backwardations which are experienced sporadically, but also inevitably, in the volatility futures market.

Keywords: VIX futures, contango, roll yield

JEL Classification: C51

Suggested Citation

Avellaneda, Marco and Papanicolaou, Andrew, Statistics of VIX Futures and Their Applications to Trading Volatility Exchange-Traded Products (February 24, 2018). The Journal of Investment Strategies, Vol. 7, No. 2, pp. 1-33 (2018) . Available at SSRN: https://ssrn.com/abstract=3028910 or http://dx.doi.org/10.2139/ssrn.3028910

Marco Avellaneda

New York University (NYU) - Courant Institute of Mathematical Sciences ( email )

251 Mercer Street
New York, NY 10012
United States
212-998-3129 (Phone)
212-995-4121 (Fax)

Finance Concepts LLC ( email )

590 Madison Avenue
21st Floor
New York, NY 10022
United States

HOME PAGE: http://www.finance-concepts.com

Andrew Papanicolaou (Contact Author)

NYU Tandon School of Engineering, Department of Finance and Risk Engineering ( email )

6 Metrotech Center
Brooklyn, NY 11201
United States

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