On February 25, Izabella Kaminska in FT Alphaville blasts the forecasting ability of the Vix futures, a CBOE futures contract that measures the volatility of the S&P 500 stock market index. Since 2009, the Vix futures has remained in contango–meaning that the far out prices exceed the near delivery future prices-and Vix futures repeatedly exaggerated their predictions of the actual volatility.
The first graph below shows the term structure of the Vix futures contracts for several trading dates in 2010 and 2011. The graph indicates that the futures curve has remained in contango. A closer examination indicates a relationship between the level of volatility and the steepness of the curve: A higher (smaller) level of the spot/near term volatility seems associated with a less (more) pronounced contango. The second graph shows the same relationship after normalizing the near term futures price to 100. On July 20, 2010, the near volatility was 28.45 and the far out volatility was 33.2, a 16.7 percent higher. By January 24, 2011, when the near volatility was a much lower 16.15, the far out contract was 26.6, a whopping 64.7 percent difference.