VIX Futures and options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis

Abstract

record is hypothetical and the portfolios have not been traded together in the manner shown in the composite. No representation is being made that any investment will or is likely to achieve a composite performance record similar to that shown. Unlike an actual performance record, hypothetical results do not represent actual trading. Also, since the performance presented does not represent an actual performance portfolio, there are numerous other factors related to the market in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Past performance is not indicative of future results. I thank Matt Moran and participants at the 2009 CBOE Risk Management Conference and the ISOM University of Massachusetts Finance Seminar series for comments and suggestions and Christian Blanke for excellent research assistance. Please address correspondence to Edward Szado, CISDM,

Positive Alpha and Negative Beta (A Strategy for Counteracting Systematic Risk)

“…We find that despite this relationship being well documented, option prices on the S&P 500 and the VIX have inadequately reflected these dynamics, even after similar observations were previously noted [7] 1 . This has given rise to the strategies discussed in this paper, all of which have functioned as an effective counter to systematic risk.…”

“…As examined by a multitude of scholars [2][3][4][5][6][7], the demand for increased protection during market declines results in an asymmetric relationship between implied volatility and the underlying price-a phenomenon known as volatility asymmetry. We find that despite this relationship being well documented, option prices on the S&P 500 and the VIX have inadequately reflected these dynamics, even after similar observations were previously noted [7] 1 .…”

“…Sources: CRSP and CBOE. 1 Szado [7] noted that the extra leverage provided by deep OTM VIX calls resulted in greater return benefits than SPX/SPY puts in market declines.…”

Diversification with volatility products

“…Using only ex-post analysis Hill (2013) confirms the recommendation of Whaley (2000) that VIX mid-term futures are useful diversification instruments for long-term investors. Other studies, like Szado (2009) and Stanescu and Tunaru (2012), simply apply ad-hoc allocations to volatility and other asset classes and examine how such allocations have performed ex-post. Guobuzaite and Martellini (2012) verify that mid-term futures are more suitable for diversification than short-term futures, this time for European markets.…”

The information content of implied volatility index (India VIX)

“…Yang and Liu (2012) investigates the predictive power of TVIX implied volatility index in the Taiwan stock market, they show that implied volatility index also hold the predictive power to forecast the future market volatility like the implied volatility of call and put options and they conclude that TVIX is an effective indicator of future volatility in the emerging markets. The studies (Daigler and Rossi 2006;Konstantinidia et al 2008;Szado 2009;Chung et al 2011;Konstantinidi and Skiadopoulos 2011;Shu and Zhang 2012) have demonstrated the informational efficiency of implied volatility index and shown that volatility products (say VIX F&Os) are helpful in the price discovery and portfolio risk management.…”