Volatility Uncertainty and VIX Futures Contango

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See all articles by Gurdip Bakshi

Gurdip Bakshi

Temple University - Fox School of Business and Management; Fox School of Business

John Crosby

University of Maryland - Robert H. Smith School of Business

Xiaohui Gao

Fox School of Business, Temple University

Jinming Xue

Cox School of Business, Southern Methodist University

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 Bakshi, Gurdip S. and Crosby, John and Gao, Xiaohui and Xue, Jinming, Volatility Uncertainty and VIX Futures Contango (September 25, 2021). Available at SSRN: https://ssrn.com/abstract=

Gurdip S. Bakshi

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

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

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States

Jinming Xue (Contact Author)

Cox School of Business, Southern Methodist University ( email )

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

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

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