Lead-Lag Relationship Between VIX and SPX Futures

The recent market correction has shown, once again, that the financial markets are strongly interconnected. The sell-off in stocks has led to a sharp increase in the credit spreads. The rally in oil price has helped commodity currencies such as the Canadian dollar and Australian dollar appreciate against the US dollar.

There exist, however, less obvious intermarket relationships, e.g. the one between the VIX futures and SP500 futures. The VIX is a measure of implied volatility in the S&P 500 Index, and the VIX futures are contracts that trade on the Chicago Board Options Exchange (CBOE) and give investors the right to buy or sell the VIX at a specific price on a future date.

Reference [1] examined the lead-lag relationship between the VIX futures and SPX futures in the high-frequency domain. It pointed out,

The analysis reveals a large time variation in the lead-lag relation. Under low volatility, the lead-lag measures should be interpreted with caution as the two markets are not strongly connected. Under high volatility, returns exhibit a stronger negative correlation and a short-lived lead-lag with a tendency for VIX futures to lead SPX futures. The VIX futures leadership confirms the important role played by the VIX futures across the various SPX-related markets.

In short, when volatility is high the VIX futures lead SPX futures. Moreover, the authors argued that the VIX futures lead over the SPX futures can be attributed mostly to hedging activities.

Moreover, we find that an increase in the proportion of cross-market trading is associated with a strengthened VIX futures lead. As VIX futures dealers can hedge their VIX futures position through delta-hedged SPX option positions, their hedging strategy would involve trading SPX futures after providing liquidity in the VIX futures market. Thereby, the hedging activities would contribute to the level of cross-market activity. Hence, it is possible that hedging activities are driving a part of the VIX futures lead over SPX futures. Another possibility is that the relation between cross-market trading and a stronger VIX futures lead appears due to a greater presence of high-frequency traders under high volatility.

Finally, the VIX futures lead is stronger when the market makers in the SPX options are in an aggregate negative gamma position.


[1] C. Bangsgaard, and T. Kokholm, The Lead-Lag Relation between VIX Futures and SPX Futures (2022). https://ssrn.com/abstract=4003464

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