Do Properly Anticipated Prices Fluctuate Randomly? Evidence from VIX Futures Markets

Abstract

The VIX index is not traded on the spot market. Hence, in contrast to other futures markets, the VIX futures contract and spot index are not linked by a no-arbitrage condition. The authors examine (1) whether predictability in the VIX index carries over to the futures market and (2) whether there is independent time-series predictability in VIX futures prices. The answer to both questions is no. Samuelson was right: VIX futures prices properly anticipate predictability in volatility and are themselves unpredictable.

TOPICS: Futures and forward contracts, volatility measures

Key Findings

• • The authors examine (1) whether predictability in the VIX generates predictability in VIX futures and (2) whether time-series momentum in VIX futures is profitable.

• • Aside from the obvious importance for understanding price formation, these questions are important for practitioners given the recent spike in VIX, the large and active market in trading volatility and volatility insurance strategies, and the demand for investment advice on what to do.

• • The short answer to both questions is no, especially after adjusting for risk and realistic transactions costs.