An Empirical Mean Reversion Test on VIX Futures

VIX mean reversion trade gets popular when the market experiences big ups and downs. You hear a lot of talks about how much money people make from trading VXX, XIV and their leveraged equivalents. However, is VIX truly mean reverting, or it seems more lucrative than it is just because people only like to talk about it when they make money and keep quiet when they lose?

In this post I use daily returns of S&P 500 VIX Short-Term Futures Index from December 2005 to August 2015 (2438 observations) to find if there’s empirical evidence that supports short-term VIX MR. It’s the most suitable vehicle for this test becuase there’s no instrument that tracks VIX spot and it is the benchmark for VXX and XIV.

VIX ST Futures Index holds VIX 1-month and 2-month futures contracts and rolls them on daily basis. Its performance suffers from contango effect like commodity futures ETFs do but it’s an inevitable cost in this case.

To find out if extreme VIX returns lead to strong short-term rebound, I group all daily returns by deciles and summarize the distributions of the accumulative future returns of each group up to 5 trading days (1 week). If VIX is truly ST MR, we should see the future returns following the 1st group (lowest) significantly higher than 0 on average, and the returns following the 10th group (highest) significantly lower than 0 on average. Future returns that go beyond the sample time period are recorded as 0.


As shown above, group 1 and group 10 are the two groups we want to focus on. If someone can systematically make money by putting in MR trade on VIX, we should see the next day (or next 2, 3, maybe 5 days) returns following these two groups distributed like this:


The actual data look like this:

Day_1_Ret_Dist Day_5_Ret_Dist

It’s hard to spot any major difference between group 1 and 10 on the next day. However, on the 5th day, accumulated returns in group 1 largely outperform group 10. To better illustrate, I perform t-test on both groups from day 1 to day 5, as reported below (H0 = average return equals 0).


As it turns out, future returns in Group 1 systematically outperform Group 10 within the next 5 days. The results are not blessed by overwhelmingly strong t-stats and p-values but it’s hard to argue that we are looking at random noises here. Additionally, this test is done by end of day prices. Intraday movements, which possibly constitute the bulk of VIX MR trades, are completely ignored by this test. Therefore the results we see are likely a mitigated version of market reality.