Tracking VIX with VIX Futures: Portfolio Construction and Performance

Tim Leung and Brian Ward

Chapter 21 in Handbook of Applied Investment Research, 2020, pp 557-596 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We study a series of static and dynamic portfolios of Volatility Index (VIX) futures and their effectiveness to track the VIX. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, compared to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

Keywords: Applied Investments; Financial Forecasting; Portfolio Theory; Investment Strategies; Fundamental and Economic Anomalies; Behaviour of Investors (search for similar items in EconPapers)
JEL-codes: G1 G11 G17 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Working Paper: Tracking VIX with VIX Futures: Portfolio Construction and Performance (2019)
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