Variance Term Structure and VIX Futures Pricing

Using no arbitrage principle, we derive a relation between the drift term of risk-neutral dynamics for instantaneous variance and the term structure of forward variance. We show that the forward variance curve can be derived from options market. Based on the variance term structure, we derive a no arbitrage pricing model for VIX futures pricing. The model is the first no arbitrage model combining options market and VIX futures market. The model can be easily generalized to price other volatility derivatives.

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VIX term structure and VIX futures pricing with realized volatility

Journal of Futures Markets ◽

10.1002/fut.21955 ◽

2018 ◽

Vol 39 (1) ◽

pp. 72-93 ◽

Cited By ~ 15

Author(s):

Zhuo Huang ◽

Chen Tong ◽

Tianyi Wang

Keyword(s):

Term Structure ◽

Realized Volatility ◽

Vix Futures ◽

Futures Pricing

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VIX VERSUS VXX: A JOINT ANALYTICAL FRAMEWORK

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024920500338 ◽

2020 ◽

Vol 23 (05) ◽

pp. 2050033 ◽

Cited By ~ 1

Author(s):

MARTINO GRASSELLI ◽

LAKSHITHE WAGALATH

Keyword(s):

Term Structure ◽

Real Data ◽

Analytical Framework ◽

Option Prices ◽

Options Market ◽

Vix Futures ◽

Consistent Manner ◽

Systematic Behavior ◽

Exchange Traded Notes ◽

Reference Index

We propose a framework for modeling in a consistent manner the VIX index and the VXX, an exchange-traded note written on the VIX. Our study enables to link the properties of VXX to those of the VIX in a tractable way. In particular, we quantify the systematic loss observed empirically for VXX when the VIX futures term-structure is in contango and we derive option prices, implied volatilities and skews of VXX from those of VIX in infinitesimal developments. We also perform a calibration on real data which highlights the flexibility of our model in fitting the futures and the vanilla options market of VIX and VXX. Our framework can be used to model other exchange-traded notes on the VIX as well as any market where exchange-traded notes have been introduced on a reference index, hence providing tools to better anticipate and quantify systematic behavior of an exchange-traded note with respect to the underlying index.

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Risk Premia and the VIX Term Structure

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109017000825 ◽

2017 ◽

Vol 52 (6) ◽

pp. 2461-2490 ◽

Cited By ~ 26

Author(s):

Travis L. Johnson

Keyword(s):

Term Structure ◽

Principal Component ◽

Risk Premia ◽

Expectations Hypothesis ◽

Variance Swaps ◽

Volatility Index ◽

Asset Pricing Models ◽

Vix Futures ◽

Synthetic Standard ◽

Variance Risk

The shape of the Chicago Board Options Exchange Volatility Index (VIX) term structure conveys information about the price of variance risk rather than expected changes in the VIX, a rejection of the expectations hypothesis. The second principal component, SLOPE, summarizes nearly all this information, predicting the excess returns of synthetic Standard & Poor’s (S&P) 500 variance swaps, VIX futures, and S&P 500 straddles for all maturities and to the exclusion of the rest of the term structure. SLOPE’s predictability is incremental to other proxies for the conditional variance risk premia, economically significant, and inconsistent with standard asset pricing models.

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The Relationship between VIX Futures Term Structure and S&P500 Returns

SSRN Electronic Journal ◽

10.2139/ssrn.2841384 ◽

2016 ◽

Cited By ~ 2

Author(s):

Athanasios Fassas

Keyword(s):

Term Structure ◽

Vix Futures ◽

The Relationship

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VIX Futures as a Market Timing Indicator

Journal of Risk and Financial Management ◽

10.3390/jrfm12030113 ◽

2019 ◽

Vol 12 (3) ◽

pp. 113 ◽

Cited By ~ 1

Author(s):

Fassas ◽

Hourvouliades

Keyword(s):

Empirical Analysis ◽

Term Structure ◽

Financial Market ◽

Market Timing ◽

Investor Sentiment ◽

Vix Futures ◽

Equity Price ◽

The Empirical Analysis ◽

Practical Implications ◽

Stock Market Timing

Our work relates to the literature supporting that the VIX also mirrors investor sentiment and, thus, contains useful information regarding future S&P500 returns. The objective of this empirical analysis is to verify if the shape of the volatility futures term structure has signaling effects regarding future equity price movements, as several investors believe. Our findings generally support the hypothesis that the VIX term structure can be employed as a contrarian market timing indicator. The empirical analysis of this study has important practical implications for financial market practitioners, as it shows that they can use the VIX futures term structure not only as a proxy of market expectations on forward volatility, but also as a stock market timing tool.

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