Applied Math Seminar
Title: Some remarks on VIX futures and ETPs
Speaker: Marco Avellaneda, NYU
Date: November 8, 2017
Location: Building 380
This talk discusses the ``VIX complex'': index, futures and exchange-traded products based on S&P 500 option-implied volatility. We examine the stationarity hypothesis for VIX and its consequences in terms of risk-modeling. PCA analysis and results of Alexander and Kavila suggest that constant-maturity VIX futures may be modeled using two common statistical factors. The VIX dynamics consists of fluctuation around an equilibrium state, which is in contango (ranging approximately from 12 (spot VIX) to 20 (long term futures)), concave down, and more concave for short tenors, and a second factor associated with exogenous shocks, which tends to invert the term structure and has large amplitudes for short-tenor futures. The latter factor has short half-life compared to the first mode. It is responsible for sporadic ``wild'' dislocation of the VIX futures during periods of market uncertainty, such as 2008, 2001, Brexit, French elections, etc. Using parametric as well as non-parametric models, we study the dynamics of VIX exchange-traded products (ETPs) associated with rolling futures strategies, and study the risk-return of volatility-selling schemes. This is joint work with Andrew Papanicolaou from NYU Engineering.