Decay in VIX futures

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master_Wallenius_Jaakko_2025.pdf (2.68 MB)

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School of Business | Master's thesis
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Date

2025

Department

Rahoituksen laitos

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Mcode

Degree programme

Finance

Language

en

Pages

56+5

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Abstract

In this thesis, we aim to better understand the empirical decay in VIX futures. We study the decay through the VIX futures basis -- the difference between the futures price and the spot VIX. We use per contract data, following the VIX futures contracts' paths to maturity. These "runs" of the basis are subsequently averaged, and then sorted into clusters using $k$-means algorithm to identify different patterns the basis may exhibit. We find that on average the VIX futures basis decay is square-root shaped. The finding supports the notion that the decay in VIX futures is similar to the time decay in options. However, the square-root pattern only fits well the contango runs. The decay in backwardation is erratic and is not easily generalizable. The decay pattern also shows a weekend effect; the basis tends to decay more over weekends than during the week. This applies to both contango and backwardation runs. Further, we find that the median term structure of VIX futures has also the same square-root shape. The findings carry implications for the practical trading of VIX futures. Notably, the instability of the term structure shape, and likewise of the decay pattern, renders the short VIX futures carry trade particularly precarious. On the other hand, holding a long position as a hedger is equally challenging; one endures a long wait for the relatively rare volatility spikes while incurring a substantial participation fee.

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Thesis advisor

Nyberg, Peter

Keywords

VIX, futures, term structure, time decay, variance risk premium, volatility

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https://urn.fi/URN:NBN:fi:aalto-202503022656

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[gradu] Kauppakorkeakoulu / BIZ