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
Date Written: June 29, 2019
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: Suggested Citation