VIX FUTURES AND BLACK FRIDAY
Last Friday (”Black Friday”) featured a risk-off move as news broke of the Omicron strain of COVID-19. Global equities fell over 2%, global sovereign yields dropped, and volatility indices spiked. The VIX index jumped from 18.58 at the close on Wednesday, November 25, to 28.62 at the close on Friday, November 27.
A VIX spike of at least 10 points has occurred 17 times in the past, with the two largest jumps happening in March 2020. In each of those 17 cases, the VIX futures curve inverted.1 In all but the last three, the curve was already inverted and in those cases it inverted further.
VIX futures are the market’s “risk-neutral” expectation of where VIX will be at maturity, so they are a forward VIX measure. A change in the price of the VIX future can reflect a change in expected VIX, a change in the risk premium associated with VIX, or both. Unfortunately, we cannot distinguish between the two.
Since 2004, the VIX futures curve has averaged a level of 19.1, and it has generally been upward sloping (83% of days). After a risk shock, we’d expect to observe an immediate increase in spot VIX. Then, as the markets price in (or not!) increased volatility in the future, concerns about volatility in the future, or both, we may see the later maturity futures rise.
We can measure the level and slope for the entire futures history for each day from the trading day prior to the shock (i.e., day -1) out to sixty trading days after the shock.
FIGURE 01 - FITTED RESULTS FOR VIX FUTURES
(April 5, 2004 - December 2, 2021)
Sources: First Quadrant, LLC, Commodity Research Bureau (CRB)
For VIX futures, the fitted curve typically starts to flatten within one day, and tends to reach equilibrium within five days. On average, it then takes about a month to get back to where it was before the risk shock. The level stays elevated (by approximately the same amount) all the way out until somewhere around 40 days.
So, what can the VIX futures curve tell us about the recent shock?
The day after the shock, the curve had already begun to flatten and even fall. This reversion was a bit faster than the historical average, suggesting that Black Friday’s moves were maybe a bit overdone. However, later this week, volatility jumped again, perhaps due to comments from the Chair Powell of the US Federal Reserve about speeding up the pace of the Fed’s taper. As of the close yesterday, December 2, the curve was near where it was at the close last Friday.
In other words, the VIX futures curve did not stabilize, as we might have expected based on previous episodes. So, perhaps the movements last Friday were not so “overdone” after all. Time will tell.
1If measured using a quadratic fit to the curve measuring the linear curve (i.e. “slope”).
Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
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