An Alternate Interpretation of VIX Evidence: Will the Real VIX Please Stand-Up?

Abstract

In spite of efforts to securitize the VIX, it cannot be done. The theoretical benefits of VIX have provided in valuable insight into the behavior of volatility but the attempts to create a tradable alternative have failed. This paper rejects the notion that VIX-products are related to the VIX, rejects the misnomer index, in favor of statistic, rejects the idea of the VIX-statistic as a separate asset class and rejects the VIX as a measure of fear. Instead, VIX-products are by design between 6-16 times different from the VIX-statistic. Using daily data from inception, the VIX is first tested as a predictor for the actual 30-day forward volatility of the S&P 500 Stock Index. Subsequent tests are based on hypotheses of equality between movements in VIX and selected VIX-products to changes in the S&P 500 Stock Index. The specific products studied are: VIX Futures 1-month roll, VIXM, VIXY, VIIX, VXX and VXZ. The VIXM and VIXY funds comprise the ETF group, while VIIX, VXX and VXZ notes represent the ETN group. The findings show that VIX is a poor predictor of SPFV and VIX-products exhibit large, significant differences from the VIX-statistic. The basic idea behind tradable volatility is to offer the benefits of VIX by mimicking its behavior. But the very creation of a secu rity provides a tangible contract that, by definition, is no longer just a statistic.