A Note of Trading the Term Structure of VIX Futures

11 Pages Posted: 14 Apr 2020

See all articles by Anusar Farooqui

Anusar Farooqui

Columbia University - Department of History

Date Written: March 18, 2020

Abstract

The term structure of VIX futures contains a very strong signal of dealer risk appetite. Unlike balance sheet quantities, this feature is available at very high frequencies. Here we exhibit two systematic strategies to mine the attendant risk premium from the term structure of expected volatility. We optimize our two hyper-parameters by OOS cross-validation. We compare our strategies to holding the S&P 500, selling short-term vol un-hedged, and a portfolio that sells short-term vol and hedges by going long on medium-term vol. We find that our strategies allow us to harvest a considerable portion of the risk premium associated with the balance sheet management of market-based intermediaries. Both in-sample and OOS, the risk-adjusted returns on our strategies are at least twice as high as the three benchmarks.

Keywords: Risk Appetite, VIX Futures, Intermediary Risk Premium, Intermediary Asset Pricing, Broker-Dealers

Suggested Citation

Farooqui, Anusar, A Note of Trading the Term Structure of VIX Futures (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=3556779 or http://dx.doi.org/10.2139/ssrn.3556779

Anusar Farooqui (Contact Author)

Columbia University - Department of History ( email )

413 Fayerweather Hall
1180 Amsterdam Avenue, MC 2527
New York, NY 10027
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
55
Abstract Views
268
rank
403,811
PlumX Metrics