Volatility Uncertainty and VIX Futures Contango

46 Pages Posted: 16 Dec 2021

See all articles by Gurdip Bakshi

Gurdip Bakshi

Temple University-Fox School of Business

John Crosby

University of Maryland - Robert H. Smith School of Business

Xiaohui Gao

Temple University-Fox School of Business

Jinming Xue

Southern Methodist University (SMU) - Finance Department

Date Written: September 25, 2021

Abstract

The VIX futures curve is most often in contango but displays backwardation during unfavorable market conditions. We construct an explanation based on the notion of stochastic orders of volatility uncertainty – meaning that investors view short-dated volatility uncertainty as being less likely to take on larger values than long-dated volatility uncertainty – under all pricing measures. We complement this theory with tractable equity price processes, whose paths consist of continuous shocks interspersed with jump discontinuities, the latter reflecting disaster uncertainty with time-varying disaster probability.

Keywords: VIX futures curve, stochastic orders, hedging instruments, contango

Suggested Citation

Bakshi, Gurdip S. and Crosby, John and Gao, Xiaohui and Xue, Jinming, Volatility Uncertainty and VIX Futures Contango (September 25, 2021). Fox School of Business Research Paper Forthcoming, SMU Cox School of Business Research Paper No. 21-19, Available at SSRN: https://ssrn.com/abstract=3930703 or http://dx.doi.org/10.2139/ssrn.3930703

Gurdip S. Bakshi

Temple University-Fox School of Business ( email )

PA 19122
United States

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Xiaohui Gao

Temple University-Fox School of Business ( email )

PA 19122
United States

Jinming Xue (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
(214)-768-4181 (Phone)

HOME PAGE: http://sites.google.com/view/jinming-xue

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