Trading signals in VIX futures

DOI10.1080/1350486X.2021.2010584MaRDI QIDQ5075243zbMATH OpenOpenAlexFDO

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)

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

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)

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.

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Cites work

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Cited in

(6)

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

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