Volatility Uncertainty and VIX Futures Contango: A Laplace Transform Order Theorem

Authors

• Gurdip Bakshi, Temple University-Fox School of BusinessFollow
• John Crosby, University of Maryland - Robert H. Smith School of BusinessFollow
• Xiaohui Gao, Fox School of Business, Temple UniversityFollow
• Jinming Xue, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

9-25-2021

Abstract

VIX futures are typically upward-sloping in calm markets but often invert during stress, despite lacking a deliverable underlying and a cost-of-carry anchor. We provide a model-free sufficient condition for pairwise VIX futures contango based on conditional Laplace-transform order across the variance pockets underlying the VIX. If the near-dated pocket is smaller in this order than a farther-dated pocket, the concave VIX payoff has a lower risk-neutral expectation, implying an upward futures slope. Stochastic disaster intensity and rough-volatility specifications show that low current variance and low disaster intensity support the ordering, whereas elevated variance or disaster intensity can reverse it and produce backwardation.

Document Type

Article

Keywords

VIX contango, volatility pockets, Laplace transform order, intertemporal risk perceptions

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English