TY - JOUR
T1 - Statistics of vix futures and applications to trading volatility exchange-traded products
AU - Avellaneda, M.
AU - Papanicolaou, A.
N1 - Publisher Copyright:
© 2019 World Scientific Publishing Company.
PY - 2019/2/1
Y1 - 2019/2/1
N2 - 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.
AB - 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.
KW - VIX futures
KW - contango
KW - volatility ETNs
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U2 - 10.1142/S0219024918500619
DO - 10.1142/S0219024918500619
M3 - Article
AN - SCOPUS:85058244301
SN - 0219-0249
VL - 22
JO - International Journal of Theoretical and Applied Finance
JF - International Journal of Theoretical and Applied Finance
IS - 1
M1 - 1850061
ER -