Published July 31, 2012
CBOE Futures Exchange
“Futures in Volatility” Newsletter
By Mark Shore
While analyzing the utility value of the CBOE Volatility Index (VIX) futuresĀ® contract relative to the underlying market (S&P 500), a question often arises regarding the correlation of these two instruments. In this article we look at various durations of rolling correlations to determine its utility value.
The “static” correlation of two investment components is often quoted in a correlation matrix table when multiple markets are discussed or if there are only two markets, a single quote.
From January 2004 to June 2012, static correlation of daily VIX end of day data to the S&P 500 is -0.75. However, a static correlation does not always offer a strong profile of correlation. Correlation typically depends on the time duration of a holding period, thus building a profile of that period. One must keep in mind the S&P 500 has a growth component, whereas the VIX is more of a mean reverting market with moments of upward or downward spikes.
Between January 2004 and June 2012, the VIX reached its maximum close of 80.06 on October 27, 2008. It reached a minimum of 9.89 on January 24, 2007. During this period the VIX has averaged 21.08
Copyright Ā©2012 Mark Shore. Contact the author for permission for republication at firstname.lastname@example.org Mark Shore has more than 20 years of experience in the futures markets and managed futures, publishes research, consults on alternative investments and conducts educational workshops.
Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Always review a complete CTA disclosure document before investing in any Managed Futures program. Managed futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.