Practical Applications of The VIX Futures Basis: Determinants and Implications

Abstract

Investors can gain exposure to volatility and means of hedging tail risk through futures contracts and exchange-traded volatility products based on the CBOE Volatility Index (VIX) . The calculations behind the VIX, however, distort the connections between the index and VIX-related product pricing so that these vehicles may not provide the benefits that investors are seeking.

In The VIX Futures Basis: Determinants and Implications , published in the Winter 2016 issue of The Journal of Portfolio Management , Gerald Buetow of BFRC Services and Brian Henderson of The George Washington University make the case for a new, tradable volatility composite designed to measure market anxiety and provide the necessary liquidity. They examine the history of the VIX, provide empirical analysis on statistical relationships and returns and explain how the current calculation methodology affects investors in practice.

TOPICS: Volatility measures, futures and forward contracts