Long Term Causality in VIX Markets

Abstract

This paper studies the dynamic relationship between the CBOE VIX index spot and futures returns by applying multi-period, non-parametric, Granger non-causality tests and measurements on conditional distributions. In contrast to the related empirical studies, it is found that VIX futures returns are strong causal for VIX spot returns, not only in the short run, but also at higher time horizons. The predictive content of the VIX futures varies widely with the prediction horizon and maturity. In particular, the returns of VIX futures with low maturities have intense predictive ability for VIX spot returns in the short run, while the causal effects from VIX futures with longer maturities are found to last longer. Evidence of bidirectional causation at multiple time horizons is also documented between VIX spot returns and the returns of futures with medium and long-term maturities. An out-of-sample forecasting exercise also supports our main findings.