VIX option‐implied volatility slope and VIX futures returns

Abstract

This paper documents the dynamics of the term structure of the implied volatility (IV) smirk of Chicago Board Options Exchange Volatility Index (VIX) options. Empirical analysis shows that VIX option-IV slope predicts VIX futures returns over the next day to month, outperforms existing investors' perception proxies in the stock and option markets. The empirical finding is rationalized through time-varying correlation between the VIX and volatility of VIX (VVIX), VIX jumps, and investors' net positions in VIX futures market.

The role of the COVID-19 pandemic in US market volatility: Evidence from the VIX index

“…The estimates concerning market conditions are consistent with Shu and Zhang (2012) , showing a negative relationship with VIX volatility. Finally, the relationship between the VIX index and VIX futures is positive, which receives statistical support from the literature ( Yoon, Ruan, & Zhang, 2022 ).…”

Option pricing with overnight and intraday volatility

“…The VX market was launched on March 26, 2004, and the market size has been steadily growing since then (Shu & Zhang, 2012; Zhang & Zhu, 2006). Yoon et al (2022) plot the daily average open interest and trading volume of VIX futures from 2004 to 2020, the figure highlights the steady growth tendency and a significant increase of 23% in trading volume in 2017. In recent data, the open interest of VX was 360,521 on April 5, 2023, with a market value of 6.88 trillion.…”

Term spreads of implied volatility smirk and variance risk premium

“…Second, we extend the study of the IV term structure. Previously, the IV term structure has been used to obtain IV factors and forecast returns, including equity returns (Guo et al, 2021; Xing et al, 2010; Yan, 2011; Yue et al, 2021), commodity returns (Aschakulporn & Zhang, 2021; Jia et al, 2021), and futures returns (Yoon et al, 2022). However, our paper explores the usefulness of IV curve factors and their term spreads to predict the VRP, which has received less attention to date.…”