Spreading European and U.S. Volatility Index Futures

It has been three years and twelve articles since I began writing the VSTOXX® newsletter. Timing seemed right (and perhaps 3 is a Fibonacci series inspired moment) to update the data of some of my past articles. Upcoming newsletters will include updated articles as well as new articles. This article updates Spreading European and U.S. Volatility Index Futures I wrote in August 2013.

Liquidity is always important to an investor or trader. Table 1 gives readers an overview of the VSTOXX® Futures liquidity over the last years.

Table 1: VSTOXX® Futures yearly volume and open interest as of March 2016.
Source: Eurex’s Exchanges monthly statistics

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Chart 1: VSTOXX® and VIX daily spot prices and the VSTOXX® / VIX daily spot spread price 1 June, 1999 to 5 April, 2016.

Source: Bloomberg data.

In Chart 1, VSTOXX® spot trades at an average premium to VIX spot of 4.37 (with a standard deviation of 4.05) and a maximum and minimum of 23.55 and -10.96 respectively. Two and three standard deviations would price the spread at 12.46 and 16.51 to the upside. On the downside the two and three standard deviations would price the spread at -3.72 and -7.77.

Calculating only the positive spread days, the average is 4.99 with a standard deviation of 3.69. About 57% of the time the VSTOXX® / VIX spread trades between 0 and 5. About 15% of the time the spread trades above 8. The spread trades above 10 about 11% of the time. The spread tends be negative about 9% of the time with an average negative premium of -1.74, a standard deviation of 1.63 and an average time period of four days.

Over the longer-term the two volatility products frequently move together as the static correlation is 0.54. The rolling “dynamic” correlations are found in Charts 2 and 3. The spread tends to widen when both indexes are rallying. However, early April 2016, only VSTOXX® was rallying, thus the spread was priced at 11.2 on 5 April, 2016.

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Chart 2: 20 day (1 month) rolling correlation of the VSTOXX® / VIX spot market 1 June, 1999 to 5, April 2016.

Source: Bloomberg data.

As noted in Chart 2, the 20 day rolling correlation of the VSTOXX® spot to VIX spot returns has a high of 0.93, a low of -0.48 and a standard deviation of 0.21. About 21% of the time the correlation is above 0.7. About 9% of the time the correlation is below 0.2.

In Chart 3 the rolling 3 month correlation has sustained a range of approximately 0.3 to 0.8 since 2009, with the exception of the beginning of 2015 when the correlation temporarily reached 0.25. The average, maximum and minimum 3 month correlation was 0.53, 0.81 and 0.08 respectively.

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Chart 4: Daily price distribution of the VSTOXX® / VIX spot spread 1 June, 1999 to 5 April, 2016. Source: Bloomberg data.

In summary, adding almost three years of daily data for the VSTOXX® / VIX spread finds the metrics comparable to previously reported data. This builds a stronger foundation for the spread’s behavior.

By Mark Shore, Founder www.shorecapmgmt.com