IDEAS home Printed from https://ideas.repec.org/a/cpn/umkdem/v14y2014p5-28.html
   My bibliography  Save this article

Does historical VIX term structure contain valuable information for predicting VIX futures?

Author

Listed:
  • Juliusz Jablecki
  • Robert Slepaczuk

    (University of Warsaw, Faculty of Economic Sciences)

  • Ryszard Kokoszczynski
  • Pawel Sakowski

    (University of Warsaw, Faculty of Economic Sciences)

  • Piotr Wojcik

Abstract

We suggest that the term structure of VIX futures shows a clear pattern of dependence on the current level of VIX index. At the low levels of VIX (below 20), the term structure is highly upward sloping, while at the high VIX levels (over 30) it is strongly downward sloping. We use these features to predict future VIX futures prices more precisely. We begin by introduc-ing some quantitative measures of volatility term structure (VTS) and volatility risk premium (VRP). We use them further to estimate the distance between the actual value and the fair (model) value of the VTS. We find that this distance has significant predictive power for volatility futures and index futures and we use this feature to design simple strategies to invest in VIX futures.

Suggested Citation

  • Juliusz Jablecki & Robert Slepaczuk & Ryszard Kokoszczynski & Pawel Sakowski & Piotr Wojcik, 2014. "Does historical VIX term structure contain valuable information for predicting VIX futures?," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 14, pages 5-28.
    • Handle: RePEc:cpn:umkdem:v:14:y:2014:p:5-28
    as

    Download full text from publisher

    File URL: https://apcz.umk.pl/DEM/article/view/DEM.2014.001/5249
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jeff Fleming & Barbara Ostdiek & Robert E. Whaley, 1995. "Predicting stock market volatility: A new measure," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(3), pages 265-302, May.
    2. Carol Alexander & Dimitris Korovilas, 2011. "The Hazards of Volatility Diversification," ICMA Centre Discussion Papers in Finance icma-dp2011-04, Henley Business School, University of Reading.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Konstantinidi, Eirini & Skiadopoulos, George, 2011. "Are VIX futures prices predictable? An empirical investigation," International Journal of Forecasting, Elsevier, vol. 27(2), pages 543-560.
    5. Gurdip Bakshi & Nikunj Kapadia, 2003. "Delta-Hedged Gains and the Negative Market Volatility Risk Premium," The Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 527-566.
    6. Marie Briere & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, ULB -- Universite Libre de Bruxelles.
    7. repec:bla:jfinan:v:59:y:2004:i:2:p:711-753 is not listed on IDEAS
    8. Egloff, Daniel & Leippold, Markus & Wu, Liuren, 2010. "The Term Structure of Variance Swap Rates and Optimal Variance Swap Investments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1279-1310, October.
    9. Emanuel Derman & Nassim Nicholas Taleb, 2005. "The illusions of dynamic replication," Quantitative Finance, Taylor & Francis Journals, vol. 5(4), pages 323-326.
    10. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    11. repec:dau:papers:123456789/7739 is not listed on IDEAS
    12. Peter Carr & Liuren Wu, 2009. "Variance Risk Premiums," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1311-1341, March.
    13. Galai, Dan, 1979. "A Proposal for Indexes for Traded Call Options," Journal of Finance, American Finance Association, vol. 34(5), pages 1157-1172, December.
    14. Peter Carr & Roger Lee, 2009. "Volatility Derivatives," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 319-339, November.
    15. Reinhold Hafner & Martin Wallmeier, 2008. "Optimal investments in volatility," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 22(2), pages 147-167, June.
    16. Nieto, Belén & Novales, Alfonso & Rubio, Gonzalo, 2014. "Variance swaps, non-normality and macroeconomic and financial risks," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 257-270.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ballestra, Luca Vincenzo & Guizzardi, Andrea & Palladini, Fabio, 2019. "Forecasting and trading on the VIX futures market: A neural network approach based on open to close returns and coincident indicators," International Journal of Forecasting, Elsevier, vol. 35(4), pages 1250-1262.
    2. Julián Andrada-Félix & Adrian Fernandez-Perez & Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero, 2022. "Time connectedness of fear," Empirical Economics, Springer, vol. 62(3), pages 905-931, March.
      • Julián Andrada-Félixa & Adrian Fernandez-Perez & Fernando Fernández-Rodríguez & Simón Sosvilla-Rivero, 2018. "“Time connectedness of fear”," IREA Working Papers 201818, University of Barcelona, Research Institute of Applied Economics, revised Sep 2018.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Juliusz Jabłecki & Ryszard Kokoszczyński & Paweł Sakowski & Robert Ślepaczuk & Piotr Wójcik, 2014. "Does historical volatility term structure contain valuable in-formation for predicting volatility index futures?," Working Papers 2014-18, Faculty of Economic Sciences, University of Warsaw.
    2. Dörries, Julian & Korn, Olaf & Power, Gabriel J., 2023. "How should the long-term investor harvest variance risk premiums?," CFR Working Papers 23-06, University of Cologne, Centre for Financial Research (CFR).
    3. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    4. Silvia Muzzioli, 2013. "The Information Content of Option-Based Forecasts of Volatility: Evidence from the Italian Stock Market," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-46.
    5. Carr, Peter & Wu, Liuren, 2016. "Analyzing volatility risk and risk premium in option contracts: A new theory," Journal of Financial Economics, Elsevier, vol. 120(1), pages 1-20.
    6. Siriopoulos, Costas & Fassas, Athanasios, 2012. "An investor sentiment barometer — Greek Implied Volatility Index (GRIV)," Global Finance Journal, Elsevier, vol. 23(2), pages 77-93.
    7. Jianlei Han & Martina Linnenluecke & Zhangxin Liu & Zheyao Pan & Tom Smith, 2019. "A general equilibrium approach to pricing volatility risk," PLOS ONE, Public Library of Science, vol. 14(4), pages 1-18, April.
    8. Kanniainen, Juho & Piché, Robert, 2013. "Stock price dynamics and option valuations under volatility feedback effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(4), pages 722-740.
    9. Carol Alexander & Johannes Rauch, 2016. "Model-Free Discretisation-Invariant Swap Contracts," Papers 1602.00235, arXiv.org, revised Apr 2016.
    10. Alexander, Carol & Korovilas, Dimitris & Kapraun, Julia, 2016. "Diversification with volatility products," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 213-235.
    11. Johannes Rauch & Carol Alexander, 2016. "Tail Risk Premia for Long-Term Equity Investors," Papers 1602.00865, arXiv.org.
    12. Nieto, Belén & Novales, Alfonso & Rubio, Gonzalo, 2014. "Variance swaps, non-normality and macroeconomic and financial risks," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 257-270.
    13. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    14. Yue, Tian & Ruan, Xinfeng & Gehricke, Sebastian & Zhang, Jin E., 2023. "The volatility index and volatility risk premium in China," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 40-55.
    15. Peter Van Tassel & Erik Vogt, 2016. "Global variance term premia and intermediary risk appetite," Staff Reports 789, Federal Reserve Bank of New York.
    16. Amit Goyal & Alessio Saretto, 2022. "Are Equity Option Returns Abnormal? IPCA Says No," Working Papers 2214, Federal Reserve Bank of Dallas.
    17. Yoo, Eun Gyu & Yoon, Sun-Joong, 2020. "CBOE VIX and Jump-GARCH option pricing models," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 839-859.
    18. Aït-Sahalia, Yacine & Amengual, Dante & Manresa, Elena, 2015. "Market-based estimation of stochastic volatility models," Journal of Econometrics, Elsevier, vol. 187(2), pages 418-435.
    19. Oscar V. De la Torre-Torres & Evaristo Galeana-Figueroa & José Álvarez-García, 2021. "A Markov-Switching VSTOXX Trading Algorithm for Enhancing EUR Stock Portfolio Performance," Mathematics, MDPI, vol. 9(9), pages 1-28, May.
    20. Oscar V. De la Torre-Torres & Francisco Venegas-Martínez & Mᵃ Isabel Martínez-Torre-Enciso, 2021. "Enhancing Portfolio Performance and VIX Futures Trading Timing with Markov-Switching GARCH Models," Mathematics, MDPI, vol. 9(2), pages 1-22, January.

    More about this item

    Keywords

    volatility term structure; volatility risk premium; VIX; VIX futures; volatility futures; realized volatility; implied volatility; investment strategies; returns forecasting; efficient risk and return measures;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpn:umkdem:v:14:y:2014:p:5-28. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Miroslawa Buczynska (email available below). General contact details of provider: http://www.wydawnictwoumk.pl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.