Trading signals in VIX futures

DOI10.1080/1350486X.2021.2010584zbMATH Open1490.91205arXiv2103.02016OpenAlexW4205223208MaRDI QIDQ5075243FDOQ5075243

Authors: Thomas Nanfeng Li, Andrew Papanicolaou, Gaozhan Wang, Marco Avellaneda 

Publication date: 10 May 2022

Published in: Applied Mathematical Finance (Search for Journal in Brave)

Abstract: We propose a new approach for trading VIX futures. We assume that the term structure of VIX futures follows a Markov model. Our trading strategy selects a position in VIX futures by maximizing the expected utility for a day-ahead horizon given the current shape and level of the term structure. Computationally, we model the functional dependence between the VIX futures curve, the VIX futures positions, and the expected utility as a deep neural network with five hidden layers. Out-of-sample backtests of the VIX futures trading strategy suggest that this approach gives rise to reasonable portfolio performance, and to positions in which the investor will be either long or short VIX futures contracts depending on the market environment.

Full work available at URL: https://arxiv.org/abs/2103.02016

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zbMATH Keywords

deep learningcross validationfeedforward neural networksVIX futurescontangotrading signals

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of statistics to actuarial sciences and financial mathematics (62P05) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (6)

• Statistics of VIX futures and applications to trading volatility exchange-traded products
• The VIX and future information
• VIX futures term structure and the expectations hypothesis
• In memoriam: Marco Avellaneda (1955–2022)
• A general framework for a joint calibration of VIX and VXX options
• QuantNet: transferring learning across trading strategies

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