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Exploiting VIX Futures Roll Return with ETNs

Posted in Commodity Futures, Volatility Effects

"Identifying VXX/XIV Tendencies" finds that S&P 500 implied volatility index (VIX) futures roll return, as measured by the percentage difference in settlement price between the nearest and next nearest VIX futures, may be a useful predictor of iPath S&P 500 VIX Short-term Futures ETN (VXX) and VelocityShares Daily Inverse VIX Short-term ETN (XIV) returns. Is there a way to exploit this predictive power? To investigate, we compare performances of:

  1. XIV B&H - buying and holding XIV.
  2. XIV-Cash - holding XIV (cash) when prior-day roll return is non-positive (positive).
  3. XIV-VXX - holding XIV (VXX) when prior-day roll return is non-positive (positive).

We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance statistics. Using daily closing prices for XIV and VXX and daily settlement prices for VIX futures from XIV inception (end of November 2010) through mid-November 2017, we find that:

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