U.S. Stock Returns and VIX Futures Curve

VIX Futures as a Market Timing Indicator

“…Thus, our empirical findings showed that VIX futures term structure can indeed be used as a stock market timing tool, as particularly the negative slope of the structure can be considered as a contrarian market timing indicator. This finding is consistent with Feldman et al (2018), who showed that the VIX futures curve captures pivotal moments in the U.S. stock market. In addition, it also coincides with investors' view that a downward-sloping VIX term structure is as an indication of an oversold market.…”

“…The papers that are closer to the scope of the present paper are by Johnson (2017), who studied the shape of the VIX term structure with respect to the price of variance risk, the expected changes in the VIX, and future equity returns, and by Feldman et al (2018), who attempted to determine whether the slope of the VIX futures curve can aid in detecting inflection points in the U.S. stock market. Both studies, however, used a different approach in estimating the term structure; Johnson (2017) constructed the VIX term structure by replicating the CBOE's VIX calculation, but with target maturities longer than one month, while Feldman et al (2018) employed the standardized difference between the seven-and four-month VIX futures prices. The approach of this article differs from the previous literature in a few ways.…”

“…We also investigate whether a steep upward-sloping term structure signals the late phase of a bullish trend and, conversely, if an inverted VIX futures term structure indicates a potential stock buying opportunity. The analysis of the VIX futures term structure is compelling because its shape may provide market signaling information (Feldman et al 2018).…”

“…First, we estimate the VIX futures term structure by fitting a linear model of the available futures prices and spot VIX level as a function of time to maturity based on least squares criterion. The proposed methodology of estimating the VIX futures term structure does not require an interpolation scheme in order to construct futures contracts with fixed constant maturities (as in Johnson 2017), nor an exponential moving average smoothing process in order to reduce the noise of the VIX futures curve (Feldman et al 2018). In addition, we follow an approach similar to that of Giot (2005), who divided recent VIX history into 20 equally-spaced percentiles and examined the underlying future returns following each of these percentiles, in order to examine whether extremely high levels of the VIX futures term structure may signal profitable buying or selling opportunities.…”