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A Note on the Premiums and Discounts Embedded in VIX Futures Prices

Travis L. Jones and Marcus T. Allen
The Journal of Investing Summer 2015, 24 (2) 69-73; DOI: https://doi.org/10.3905/joi.2015.24.2.069
Travis L. Jones
is an associate professor of finance at Florida Gulf Coast University’s Lutgert College of Business in Fort Myers, FL.
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  • For correspondence: tljones@fgcu.edu
Marcus T. Allen
is Alico Chair in Financial Management and Eminent Scholar of Finance at Florida Gulf Coast University’s Lutgert College of Business in Fort Myers, FL.
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  • For correspondence: timallen@fgcu.edu
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Abstract

This article illustrates the volatile nature of the premiums and discounts embedded in the prices of VIX (Chicago Board Options Exchange Market Volatility Index) futures contracts. The fact that the underlying VIX index cannot be traded leads VIX futures to be priced more on expectations of market participants than on a typical cost-of-carry relationship. As they near expiration, VIX futures, in the aggregate, tend to trade at an increased premium, when trading in contango, and at an increased discount, when trading in backwardation. In addition, the premium in these contracts tends to peak as the VIX index nears a low, and the discount in the contracts tends to bottom as the index nears a high.

TOPICS: Mutual funds/passive investing/indexing, futures and forward contracts, analysis of individual factors/risk premia

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The Journal of Investing: 24 (2)
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A Note on the Premiums and Discounts Embedded in VIX Futures Prices
Travis L. Jones, Marcus T. Allen
The Journal of Investing May 2015, 24 (2) 69-73; DOI: 10.3905/joi.2015.24.2.069

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A Note on the Premiums and Discounts Embedded in VIX Futures Prices
Travis L. Jones, Marcus T. Allen
The Journal of Investing May 2015, 24 (2) 69-73; DOI: 10.3905/joi.2015.24.2.069
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  • Article
    • Abstract
    • DATA AND METHODOLOGY
    • VIX FUTURES AS CONTRACTS NEAR EXPIRATION
    • VIX FUTURES PREMIUM/DISCOUNT OVER TIME
    • CONCLUSION
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