Dori Levanoni
December 3, 2021

Last Friday (”Black Friday”) featured a risk-off move as news broke of the Omicron strain of COVID-19. Global equities fell over 2%, global sovereign yields dropped, and volatility indices spiked. The VIX index jumped from 18.58 at the close on Wednesday, November 25, to 28.62 at the close on Friday, November 27.

A VIX spike of at least 10 points has occurred 17 times in the past, with the two largest jumps happening in March 2020. In each of those 17 cases, the VIX futures curve inverted.1 In all but the last three, the curve was already inverted and in those cases it inverted further.

VIX futures are the market’s “risk-neutral” expectation of where VIX will be at maturity, so they are a forward VIX measure. A change in the price of the VIX future can reflect a change in expected VIX, a change in the risk premium associated with VIX, or both. Unfortunately, we cannot distinguish between the two.

Since 2004, the VIX futures curve has averaged a level of 19.1, and it has generally been upward sloping (83% of days). After a risk shock, we’d expect to observe an immediate increase in spot VIX. Then, as the markets price in (or not!) increased volatility in the future, concerns about volatility in the future, or both, we may see the later maturity futures rise.

We can measure the level and slope for the entire futures history for each day from the trading day prior to the shock (i.e., day -1) out to sixty trading days after the shock.

(April 5, 2004 - December 2, 2021)

Fitted Results for VIX Futures

Sources: First Quadrant, LLC, Commodity Research Bureau (CRB)

For VIX futures, the fitted curve typically starts to flatten within one day, and tends to reach equilibrium within five days. On average, it then takes about a month to get back to where it was before the risk shock. The level stays elevated (by approximately the same amount) all the way out until somewhere around 40 days.

So, what can the VIX futures curve tell us about the recent shock?

The day after the shock, the curve had already begun to flatten and even fall. This reversion was a bit faster than the historical average, suggesting that Black Friday’s moves were maybe a bit overdone. However, later this week, volatility jumped again, perhaps due to comments from the Chair Powell of the US Federal Reserve about speeding up the pace of the Fed’s taper. As of the close yesterday, December 2, the curve was near where it was at the close last Friday.

In other words, the VIX futures curve did not stabilize, as we might have expected based on previous episodes. So, perhaps the movements last Friday were not so “overdone” after all. Time will tell.

1If measured using a quadratic fit to the curve measuring the linear curve (i.e. “slope”).

Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© First Quadrant, LLC, 2021. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, LLC, only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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