STATISTICS OF VIX FUTURES AND APPLICATIONS TO TRADING VOLATILITY EXCHANGE-TRADED PRODUCTS

M. Avellaneda () and A. Papanicolaou ()
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M. Avellaneda: Courant Institute of Mathematical Sciences, New York University, 251 Mercer Street, New York 10012-1185, NY, USA
A. Papanicolaou: Department of Finance and Risk Engineering, NYU Tandon School of Engineering, 6 MetroTech Center, Brooklyn 11201, NY, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2019, vol. 22, issue 01, 1-30

Abstract: We study the dynamics of VIX futures and ETNs/ETFs. We find that contrary to classical commodities, VIX and VIX futures exhibit large volatility and skewness, consistent with the absence of cash-and-carry arbitrage. The constant-maturity futures (CMF) term-structure can be modeled as a stationary stochastic process in which the most likely state is contango with VIX ≈ 12% and a long-term futures price V∞≈ 20%. We analyze the behavior of ETFs and ETNs based on constant-maturity rolling futures strategies, such as VXX, XIV and VXZ, assuming stationarity and through a multi-factor model calibrated to historical data. We find that buy-and-hold strategies consisting of shorting ETNs that roll long futures, or buying ETNs that roll short futures, will produce theoretically-sure profits if it is assumed that CMFs are stationary and ergodic. To quantify further, we estimate a 2-factor lognormal model with mean-reverting factors to VIX and CMF historical data from 2011 to 2016. The results confirm the profitability of buy-and-hold strategies, but also indicate that the latter have modest Sharpe ratios, of the order of SR = 0.5 or less, and high variability over 1-year horizon simulations. This is due to the surges in VIX and CMF backwardations which are observed sporadically in the volatility futures market.

Keywords: VIX futures; volatility ETNs; contango (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024918500619

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