What Do VIX and VIX Futures Say

Look at the level of VIX and VIX Futures between 2 dates– Dec 1, 2014 and Dec 11, 2014. The chart below shows that the VIX term structure changed its shape – from  contango on Dec 1, 2014 (i.e. spot VIX below the VIX futures level) to moderate backwardation compared to spot VIX level for the near-term expiring futures and flat for the longer term expirations on Dec 11, 2014. It is also interesting to note that the Dec 11, 2014 term structure has its values oscillating around the long-term historical average (2004-2014 period) of VIX of 19.6. So the expectations of the 30-day volatility, implied in the VIX futures on Dec 11, 2014, are for moderately lower volatility, while at the beginning of December futures levels clearly have indicated increase of volatility. Near-term maturing futures as well as the VIX itself changes were more palpable than the longer term maturing VIX futures (see the gap between Dec 1 and Dec 11, 2014 for the near-term maturity and longer-term maturity). While players are generally paying a premium for future volatility insurance (Dec 1, 2014 in our case), this was not the case on Dec 11, 2014.

So what? Is this a signal that difficulties for the markets will continue in the short-run? Well, depends.

It is assumed that VIX is mean-reverting, i.e. tend to revert to the long-term average level. Is it so? An approach to check this is to use rescaled range analysis (explained in a previous post) on log-changes of VIX for the period Jan 2, 1990-Dec 12, 2014. Applying the same methodology as used for checking selected CEE stock indices state, we get value for the H-exponent  (the slope coefficient of the linear regression) of 0.3679. This result shows that VIX index does really exhibit a mean-reverting pattern. 

 While term structure of VIX-VIX Futures has been experiencing backwardation pattern in the past (2008, 2010, 2011) when markets faced with trouble, spot VIX was above the long-term average level. Currently, this is not the case. So, in my opinion, the reading of the recent VIX spike does not necessarily imply  the current hard times for the markets to continue (moreover, VIX futures expiring in Jul and Aug 2015 trade at higher levels than spot VIX).