Tracking VIX with VIX Futures: Portfolio Construction and Performance

Handbook of Applied Investment Research, J. Guerard and W. Ziemba eds., World Scientific Publishing Co, forthcoming, 2020

22 Pages Posted: 2 Jul 2019 Last revised: 12 Nov 2019

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Brian Ward

Columbia University

Date Written: June 29, 2019

Abstract

We study a series of static and dynamic portfolios of VIX futures and their effectiveness to track the VIX index. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, comparing to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

Keywords: futures, volatility, index tracking, exchange-traded funds

JEL Classification: G11, G13

Suggested Citation

Leung, Tim and Ward, Brian, Tracking VIX with VIX Futures: Portfolio Construction and Performance (June 29, 2019). Handbook of Applied Investment Research, J. Guerard and W. Ziemba eds., World Scientific Publishing Co, forthcoming, 2020, Available at SSRN: https://ssrn.com/abstract=3412132 or http://dx.doi.org/10.2139/ssrn.3412132

Tim Leung (Contact Author)

University of Washington - Department of Applied Math ( email )

Lewis Hall 217
Department of Applied Math
Seattle, WA 98195
United States

HOME PAGE: http://faculty.washington.edu/timleung/

Brian Ward

Columbia University ( email )

New York, NY
United States

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