Rolling Volatility Futures Indexes

Fellow blogger Vance from Six Figure Investing created a complete suite of volatility indexes based on VIX futures, from their inception in 2004 until present. The indexes he created are total return indexes and therefore suitable for backtesting.

Actually they are even better than "official" indexes like SPVXSTR, because they have longer history, and correct data errors in the original index calculation! The last point is extremely important if you are trying to backtest VIX futures strategy - on some days settlement data from CBOE and Bloomberg did not match, and in other days rollover days were not accounted for in a proper manner. Link to the data, link to very detailed description of the calculations and sources.

VXEM Volume

It looks like VXEM Futures launch was a success after all - total volume for the first week was 1527 contracts, and current open interest stands at 380. Wednesday was a particularly active day, trading over 1000 contracts. Trading activity seems to be distributed across months with March contract being the most active. CBOE already indicated that VXEM options are on the way, and it would be very exciting to see another volatility product in addition to VIX.

Variance Risk Premium In VIX Options

Few months ago I wrote about excellent research from Reed Hogan on volatility risk premium in VIX options. He has polished up the paper for academic publication, and the new version is now available on SSRN.

VKOSPI Futures On The Way

More exciting news from the world of listed volatility futures: in a recent interview Kim Jingyu - Korea Exchange official stated that exchange plans to list volatility futures on VKOSPI - nation's volatility index based on Kospi 200 options "as soon as possible". Link to the Bloomberg article here; at the time of writing I could not find any information about proposed contract specs. 

VXEM Modest Début

VXEM - futures on VXEEM index were listed on CBOE yesterday, and traded 5 contracts. This is a very weak beginning, which is even worse than GVZ that traded 8 contracts on its first day. At the time of writing CBOE has not updated their website on the volume for the new product. We still have high hopes for VNKY and VHSI futures.

Artemis Capital Management

Christopher Cole, of Artemis Capital Management publishes a quarterly newsletter discussing everything from macro effects on volatility to technical aspects of risk distributions. His newsletter is a must-read for any volatility professional. Here are the links to the past newsletters, and I will be adding new ones to Volatility Publications page.


Fighting Greek Fire with Fire: Volatility Correlation, and Truth, September 30, 2011
Is Volatility Broken? Normalcy Bias and Abnormal Variance, March 30, 2011
The Great Vega Short- volatility, tail risk, and sleeping elephants, January 4, 2011
Unified Risk Theory - Correlation, Vol, M3 and Pineapples, September 30, 2010

Error Analysis of Volatility Forecasts in 2011

For the sake of complete transparency I keep a log of all forecasts made on the blog - this way you can plainly see if my model is valid, or if it is full of sh!t. The end of the year is a good time to summarize forecasting performance. 2011 was not an easy year marker with completely unforeseeable earthquake in Japan, political events in Egypt and Libya, and Sovereign Debt Crisis, but the VIX model performed well.

Of the 12 forecasts my forecast error (calculated as absolute difference between my forecast and VRO - VIX settlement value) was smaller than the market's 8 times out of 12. The average error was 4.44 vs 4.80 in the futures. Simulated trading signals also performed well - there were 5 buys signals and 7 sell signals with simulated PL of 41.64 VIX points, or 3.47 VIX points per month. For simplicity transaction costs are not taken into account. There were 4 negative months and 8 positive ones. While most of the profit was made in 3 months with PL over 10 VIX points, the model is positive even after removing these 3 top months.

VXEEM - Emerging Markets Volatility Index Futures Coming To CBOE

CBOE announced that they are launching VXEEM futures on January 9th 2012, and I think there is a good chance the product will take off. At the time when CBOE launched GVZ futures they did not have DPM, however they do have DPM now for VXEEM futures. Also VXEEM has similar dynamics to the VIX, and hopefully that will create some liquidity spillover. Of course I should mention in the timeline of listed volatility products there are many more delisted and inactive volatility products than there are successful ones, but I hope  with coming listings of volatility products (VNKY, VHSI, etc) that we will finally see volatility futures as the first-rate products.

P.S. No date for VXEEM options launch.

VHSI Futures: HSI Volatility Index Futures to Trade on HKEx

Another exciting development in the world of listed volatility products: Hong-Kong Exchange announced listing of futures on VHSI Index at the end of February 2012. This will bring the number of volatility futures products to 5 adding to VIX in the US, VSTOXX in Europe, RTSVX in Russia, VNKY in Japan that are also being launched next year.

News release with product specifications here, Risk magazine article here.

Two months ago I actually mentioned the possibility of VHSI futures on my blog:  "Hang-Seng Indexes Company announced some technical changes to calculation of VHSI - HSI Volatility Index. I am speculating that there is usually no reason to change index methodology unless the exchange is planning to do something, and it may indicate the first step toward Hong-Kong volatility derivatives" 

Expiration Analysis

VIX and VSTOXX finished at their lowest levels in months: VRO - VIX expiration value for December is 21.36, and VSTOXX Index closed Wednesday session at 30.26. Both numbers are siginificatly lower than the forecasts that I made last month, as the markets reacted to a number of good news items from Europe, and possibly end of year seasonality. My direction forecast for VIX was correct, while VSTOXX was not. This unfortunately seems to be the pattern lately - my VIX forecasts are more accurate on the direction than VSTOXX, especially when direction signals disagree.

My forecast for next expiration is for VIX to close at 23.10 vs 24.50 in the futures, and VSTOXX to close at 30.48 vs 32.25 in the futures. Futures prices are Wednesday settlement prices. As before all the forecasts are saved in forecasts tracker page.