Causal Relationship Between VIX ETPs and Futures in Low- and High-Volatility Regimes

VIX Exchange-Traded Products (ETPs) are financial instruments designed to provide exposure to the CBOE Volatility Index (VIX), which measures the market's expectation of 30-day forward-looking volatility derived from S&P 500 options. VIX ETPs, such as ETFs and ETNs, allow investors to gain exposure to volatility without directly trading options or futures on the VIX. These products often use VIX futures contracts to simulate exposure to the VIX index, with strategies ranging from short-term to mid-term volatility.

Research has focused on examining the lead-lag relationship between VIX ETPs and VIX futures. Reference [1] similarly investigates this relationship but goes further by examining the causal relationship across different regimes. Specifically, it categorizes the market into two regimes: regime 1, classified as low-mean, low-volatility, and regime 2, classified as high-mean, high-volatility. The authors pointed out,

Cointegration tests reveal unique stable long-run equilibrium relations between VIX ETPs and Futures. Regime shifting models demonstrate the time variation in causation with the volatility of volatility, in particular highlighting different causal relations between ETFs versus ETNs, with causality more stable between high and low volatility regimes for ETFs. In our models, regime 1 is classified as low-mean low-volatile, while regime 2 is classified as high-mean high-volatile, with about 25 times larger volatility than regime 1. Markets return to equilibrium more swiftly regime 1 compared to 2.

We observe time variation in causality with the volatility of volatility. In particular, demand pressures for VIX ETNs and futures can change in different regimes. For example, SPVXSTR sensitive to VXX in regime 1 than regime 2, and XIV is substantially more sensitive to TVIX in regime 2 than 1. On the other hand, we observe very little variation in causality between regimes 1 and 2 for the corresponding ETFs.

In summary, for VIX Exchange-Traded Notes (ETNs), which are unsecured, the study observes a time variation in causality influenced by the volatility of volatility. Specifically, SPVXSTR is more sensitive to VXX in regime 1 than in regime 2, while XIV is significantly more sensitive to TVIX in regime 2 than in regime 1. For Exchange-Traded Funds (ETFs), which hold the underlying assets they track, the study finds very little variation in causality between regimes 1 and 2.

This research contributes additional granularity to the literature on VIX ETPs and futures.

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References

[1] Michael O’Neill and Gulasekaran Rajaguru, On the analysis of time-varying causality between VIX exchange-traded products and VIX futures contracts in high and low volatility regimes, Journal of Accounting Literature, 2024

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