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Using VIX futures to hedge forward implied volatility risk

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  • Lin, Yueh-Neng
  • Lin, Anchor Y.

Abstract

The fair value of VIX futures is derived by pricing the forward 30-day volatility which underlies the volatility risk of S&P 500 in the 30days after the futures expiration. While forward implied volatility can also be traded with forward-start strangles, this study demonstrates that VIX futures could offer more effective volatility-risk hedge for an investor who has a short position on the S&P 500 futures call option. In particular, the delta-vega-neutral hedging strategy incorporating stochastic volatility on average outperforms in out-of-sample hedging. Adding price jumps further enhances the hedging performance during the crash period.

Suggested Citation

  • Lin, Yueh-Neng & Lin, Anchor Y., 2016. "Using VIX futures to hedge forward implied volatility risk," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 88-106.
    • Handle: RePEc:eee:reveco:v:43:y:2016:i:c:p:88-106
    DOI: 10.1016/j.iref.2015.10.033
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    Cited by:

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    2. Hong, Hui & Sung, Hao-Chang & Yang, Jingjing, 2018. "On profitability of volatility trading on S&P 500 equity index options: The role of trading frictions," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 295-307.
    3. Jung Park, Yuen & Kutan, Ali M. & Ryu, Doojin, 2019. "The impacts of overseas market shocks on the CDS-option basis," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 622-636.

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    More about this item

    Keywords

    VIX futures; Forward implied volatility; Forward-start strangles; Stochastic volatility; Price jumps;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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