# Tag Info

17

A synthetic model for the VIX would be quite useful. I just mention this since it has been covered elsewhere in the past, although I don't think that it's a real solution to your problem (for a number of reasons). Several blogs posted on the "William's VIX Fix" (WVF) in the past: marketsci, trading the odds, mindmoneymarkets. The WVF is intended to be a ...

17

VIX measures volatility. It doesn't always go up if stocks go down.

14

Increased volatility (high VIX) signifies more risk. To keep their portfolio in line with their risk preferences, market participants deleverage. Since long positions outweigh short positions in the market as a whole, deleveraging entails a lot of selling and less buying. The relative increase in selling causes downward pressure on stocks.

10

A few thoughts. Yes, your return series are autocorrelated (i.e., stocks don't exactly follow a random walk), so you should use Newey-West standard errors. If you do this as a univariate regression $$R_{i,t} = \alpha_i + \beta_i R_{j,t-1} + \epsilon_{i,t}$$ then there's almost certainly an omitted variable inside $\epsilon$ that is moving both $R_i$ and $... 10 VIX also has a lot of complexities that make it a less-than-ideal hedging tool if you're buying a VIX ETF. http://vixandmore.blogspot.com/ goes into it at length and can probably also answer any questions you have about the VIX as a hedge. To expand on what @barrycarter said, the VIX is better as a hedge against kurtosis, not against downward movements. 8 The best theoretical model for pricing vix futures and options is a variance gamma model. However in practice that class of models is difficult to get robust results... In practice, most floor traders in vix products base their hedging off of the SPX option chain. Vix is calculated from those options, in the first place, so this approach makes intuitive ... 8 Technically, yes, the VIX is a measure of implied volatility. But practically speaking, it is a measure of market uncertainty: when market participants are uncertain of the future, they buy options to protect their positions, driving up option premiums and increasing implied volatility. The broader market hates uncertainty, however, so that same uncertainty ... 7 Generally, one holds VXX (or VXZ) for the same reasons one holds any long-volatility position, either (a) as a directional bet on volatility or (b) as a hedge to large directional moves or implicit short volatility positions. Obviously the former reason is often shorter-term. In the second case, it's relatively easy to see that, say, an equity portfolio ... 7 Short answer: yes. Long answer: the challenge in trading these things, like you mentioned, is that each contract is not perfectly hedgable. This is an intentional choice made by the exchanges that list these products, so that they can provide an incentive to trading firms(locals) to provide liquidity for these new products and help boost trading volume. ... 7 VIX is mechanically determined from the price of S&P500 call and put options. So if the demands for S&P500 calls/puts rise, then the prices rise, then the implied vol from these options rises. During a down market there's a lot of demand for portfolio protection. If you're diversified, then S&P500 puts are good protection, so the prices for puts ... 7 VIX is a measure of implied volatility, specifically, model-free implied volatility, a concept originally developed by Demeterfi et. al. at Goldman Sachs in the 1990s. One of my recent questions, How to extrapolate implied volatility for out of the money options?, addressed some aspects of MFIV, and the papers mentioned in the question and answers will give ... 7 For How VIX works you can read this wonderful blog : http://onlyvix.blogspot.com/2011/09/intuitive-understanding-of-vix-formula.html It provide wonderful non mathematical explanation of the how vix is actually computed. Now comes to your last answer why vix is inversely related to market movement ? In simple words, if market is more volatile then ... 7 There were two changes to the VIX; the first change in 2003 that switched from S&P 100 options to S&P 500, and from implied volatility to variance swap method. The second change was in 2014 when calculation included weekly options. Before 2014 the first series used had to have at least one week to expiration. Then the next series was used without ... 6 Have you considered fitting ARIMA with exogenous regressors model? Linear regression with autocorrelated errors might be appropriate. R can do this with the arima() function via specifying the xreg argument. 6 VIX is calculated from a basket of SPX options, and VIX futures expire into following expiration, e.g. September VIX futures that will expire next Wednesday will use SPX October options chain to calculate settlement value. If$B$is the value of the basket then VIX value at expiration is$\sqrt{ B }$. Then VIX futures price is the expectation of the basket$...

6

Your question is an important one, but I am not aware of any particularly satisfying answer. There are several papers on this issue -- see Luo and Zhang 2009 and Zhang et al 2010, just for example. One thing to note is that VIX futures are not always in contango -- after large jumps in the VIX, they can even be in rather steep backwardation. I have heard ...

6

Your questions about contango in VIX futures have close analogies in options too. The Black & Scholes model suggests that all time frames and all strikes should have the same implied volatility, but they don't. I think one of the reasons is that the B&S model assumes that stock returns are distributed in a normal (gaussian) distribution, but ...

5

Richardh is spot on. The price of the VIX option is a weighted sum of put (strikes < forward) and call (strikes > forward) options on the S&P 500. The weights are proportional to 1/strike^2. As the S&P goes down the out of the money puts become more valuable and those have the highest weights. I will leave arguments about the market as a whole to ...

5

Short Answer : Futures don't have Greeks Long Answer : Assuming a non strictly mathematical (i.e. false) point of view. Well, having Greeks on VIX Futures is not relevant, VIX value is itself a "Greek" (and Futures don't have Greeks). Sensitivity to Price of the Underlying : Insensitive (ν = 0) Volatility of the Underlying : Delta Δ = 1 (to Volatility ...

5

In that white paper itself they quote where it came from: “More than you ever wanted to know about volatility swaps” by Kresimir Demeterfi, Emanuel Derman, Michael Kamal and Joseph Zou, Goldman Sachs Quantitative Strategies Research Notes, March 1999. This is a classic article which you should definitely read if you are trading volatility. While there might ...

5

Because VXX is not designed to track the spot VIX. http://blogs.cfainstitute.org/insideinvesting/2014/02/12/doing-what-it-says-on-the-tin-the-value-of-volatility-etps/

5

VIX is a measure of volatility -- something that changes explicitly with uncertainty. The chances of uncertainty arising tomorrow, is lower than the chances of uncertainty increasing in the longer term. A long-dated option should therefore have more "potential uncertainty" baked into the price. When pricing normal futures, the price is a martingale, the ...

4

I'm going to go ahead an assume the spread you were looking at involved exchange traded options. As you presumably know, the actual implied volatility on your screen is a number derived from option prices by running the Black-Scholes model "backwards" from quoted option price to volatility. Higher prices imply higher volatility. That last statement is the ...

4

The key in vix based etn's, or any exotic etf/etn in general is the tracking error. Compared to the spot vix (or short spot vix), even considering the long-short term structure features that xvix has, the tracking error is going to be nontrivial. Even leveraged equity basket etfs have terrible tracking error. The exotics are even worse... Just compare a ...

4

You have to ask yourself what the ultimate purpose of this parameterization is. In their case, they imply the "end-goal is martingale pricing or maximum-likelihood estimation", both of which are ultimately about capturing long-period dynamics rather than intraday or interday behavior. For this reason, the fact that intraday variance may, ahem, vary around ...

4

VIX futures tend to rise when the S&P 500 falls -- the correlation of returns is about -0.7. If there were no contango in VIX futures, everyone would buy them to get free insurance against stock market declines. Here is a recent working paper making this argument -- note the last sentence of the abstract. http://skinance.com/documents/...

4

Due to the lack of a carry arbitrage, VIX futures are actually the direct hedge for VIX Index options

4

Strictly speaking, indices such as the VIX are built to approximate the expected variance (of log-returns) that would effectively realise under a pure diffusion setting (i.e. no jumps) $$\frac{dX_t}{X_t} = \mu(t) dt + \sigma(t,.) dW_t^{\mathbb{Q}}$$ Writing out the equations (*) yields the famous static replication formula in terms of strike-weighted OTMF ...

3

XVIX volume today was 11k shares. Back month VIX futures volume is almost 2k contracts in Mar13 and higher from there as you get nearer in time. Given the multiplier in the futures I don't see the problem, esp. now that the back month bid/ask spreads are usually one or two ticks wide. If the ETN product did really take off, UBS could do what Credit Suisse ...

3

I've been looking around for the holdings of this device, and so far I can't find it listed anywhere. I'll keep looking, but unless I find something to the contrary, it looks like UBS is your credit risk (if they go down, this thing goes down). And, remembering Lehman Bros, that possibility is something to think about.

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