VIX Futures Term Structure and the Expectations Hypothesis

VIX futures term structure and the expectations hypothesis Quantitative Finance, Volume 20, Issue 4 (2020): 619-638. https://doi.org/10.1080/14697688.2019.1684549

Posted: 7 Jan 2021

See all articles by Ivan Asensio

Ivan Asensio

University of San Francisco - School of Management

Date Written: November 27, 2019

Abstract

Tests of the expectations hypothesis reveal that the slope of the VIX futures term structure predicts the direction but not the magnitude of the evolution of the short-end of the curve, but predicts neither the direction nor the magnitude of short-term changes in the long-end of the curve. Relative value seeking spread trades, constructed to exploit such violations, deliver excess returns with annualized Sharpe ratios equal or greater than those of volatility-writing strategies deployed by VIX ETN's for a majority of the 32 spread trade combinations tested. I demonstrate that profits from beta-neutral variations of the spread trades, which are not compensation for taking on equity downside risk by design, are propagated by inflows of capital into VIX futures markets, after controlling for factors that measure changes in the availability of hedge fund capital, risk appetite, and momentum. At the heart of profits, and by extension the term structure anomalies, is a disproportionally elevated basis propagated by long VIX demand that enters the futures market through ETN channels.

Keywords: Financial Futures, Implied Volatilities, Quantitative Trading Strategies, Term Structure, Expectations Hypothesis, Role of Derivatives Securities Mis-Pricing

JEL Classification: B23, G13, G14

Suggested Citation

Asensio, Ivan, VIX Futures Term Structure and the Expectations Hypothesis (November 27, 2019). VIX futures term structure and the expectations hypothesis Quantitative Finance, Volume 20, Issue 4 (2020): 619-638. https://doi.org/10.1080/14697688.2019.1684549, Available at SSRN: https://ssrn.com/abstract=3723837

Ivan Asensio (Contact Author)

University of San Francisco - School of Management ( email )

San Francisco, CA 94117
United States

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