Lead-Lag Relationship Between the VIX Index and VIX Futures

In a previous post, we discussed the lead-lag relationship between the volatility index, VIX, and SPX futures. In this post, we are going to look at the relationship between the VIX index and VIX futures.

The volatility index, VIX, is a measure of the stock market’s expectation of volatility over the next 30 days. The VIX index is calculated by taking a weighted average of the prices of put and call options on the S&P 500 index. The VIX is sometimes referred to as the “fear index” because it tends to spike when investors are worried about a sudden drop in the stock market.

VIX futures are derivative contracts that allow investors to bet on the direction of the VIX.  They are traded on the Chicago Board Options Exchange (CBOE). VIX futures were first introduced in 2004, and they are now one of the most popular derivatives contracts. VIX futures are traded in monthly contracts, and each contract represents a bet on the direction of the VIX index at the end of the contract month.

Reference [1] examined the lead-lag relationship between the VIX index and VIX futures. It utilized the symmetric thermal optimal path (TOPS) method that can handle non-stationary time series. The authors found out,

The empirical results suggest several primary findings. First, there exists a time-dependent lead-lag relationships between the VIX and VIX futures in most of the time. Second, the VIX lead its futures in the first few years. Specially, the VIX futures lagged the VIX by less than 5 days in most time of the Phase 1. We conjecture that this might be because of the lower volume of trading in the VIX futures markets. We further find that the VIX futures become much more important over time, especially after the introduction of the VIX options in 2006 and the VIX ETPs in 2009. In other words, the lead-lag dynamics seem to alternate since February 24, 2006, with sometimes the VIX leading its futures, while at other times the VIX futures leads the VIX. This could be explained by the launch of VIX derivatives which has caused the increment in the informativeness of the VIX futures markets. Our results are of great importance to the research of causality between the VIX and its futures.

Briefly, in the early days, the VIX index led its futures. However, the dynamics has changed; VIX futures now sometimes lead the spot market. This could be explained by the launch of VIX options and Exchange-Traded Notes.


[1] Yan-Hong Yang and Ying-Hui Shao, Time-dependent lead-lag relationships between the VIX and VIX futures markets, 2019, https://doi.org/10.48550/arXiv.1910.13729

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