Lead-Lag Relationship Between VIX ETPs and VIX Futures

VIX ETPs, such as VXX, are exchange-traded products designed to track the performance of the CBOE Volatility Index (VIX). The VIX is a measure of the expected volatility of the S&P 500 index over the next 30 days, and it is often referred to as the “fear index” because it tends to rise during periods of market stress and uncertainty. VIX ETPs enable investors to gain exposure to the spot VIX without having to trade futures contracts or options, which can be complex and require a high level of expertise.

Similarly, VIX futures also allow investors to trade the VIX index. They are listed on the CBOE Futures Exchange and can be used by investors for hedging against market volatility or for speculating on market movements. Like other futures contracts, VIX futures are settled in cash on the expiration date, and their value can fluctuate significantly based on market conditions and investor sentiment.

Reference [1] examined the lead-lag relationship between VIX ETPs, VIX futures, and the spot VIX. The authors pointed out,

Studies of high-frequency lead-lag relations reveal that all the 1x long, 1x inverse and 2x leveraged ETPs studied all lead VIX, regardless of whether markets are in contango or backwardation. As with VIX Futures, VIX ETPs also predict VIX. The lead-lag relations with VIX Futures are less obvious, similar to the findings of Bollenet al. (2017). However, we find that term structure of volatility has a significant impact on lead-lag relations between VIX Futures and ETPs. When the market is in backwardation, VIX ETPs tend to lead Futures more often, and particularly VXX and UVXY which lead in the majority of such days. Moreover, the duration of lead-lag relations can be 1–2 min when ETPs lead and lead-lag relations are statistically significant, suggesting that arbitrage opportunities might be possible.

In short, VIX ETPs, like VIX futures, also lead the spot VIX. The relationship between VIX ETPs and futures, on the other hand, is less obvious. VIX ETPs lead VIX futures only when the market is in backwardation.

Even though the authors suggested that VIX ETP-futures arbitrage is possible, we note that the opportunity is short-lived. Therefore, one would need to invest heavily in infrastructure to be able to exploit it.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Michael O’Neill, GulasekaranRajaguru, Causality of price movements in VIX exchange-traded products and VIX futures contracts, Journal of Accounting Literature, April 2023

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