Volatility Uncertainty and VIX Futures Contango

Authors

Gurdip Bakshi, Fox School of Business and ManagementFollow
John Crosby, Robert H. Smith School of BusinessFollow
Xiaohui Gao, Temple University, Fox School of Business and Management, Department of Finance, StudentsFollow
Jinming Xue, Finance DepartmentFollow

Publication Date

12-16-2021

Abstract

The VIX futures curve is most often in contango but displays backwardation during unfavorable market conditions. We construct an explanation based on the notion of stochastic orders of volatility uncertainty – meaning that investors view short-dated volatility uncertainty as being less likely to take on larger values than long-dated volatility uncertainty – under all pricing measures. We complement this theory with tractable equity price processes, whose paths consist of continuous shocks interspersed with jump discontinuities, the latter reflecting disaster uncertainty with time-varying disaster probability.

Document Type

Article

Keywords

VIX futures curve, stochastic orders, hedging instruments, contango

Disciplines

Finance

DOI

10.2139/ssrn.3930703

Source

SMU Cox: Finance (Topic)

Language

English