Building Front-Month VIX Futures Returns for Realized Volatility
Summary
The document explains how to construct a return series for measuring realized volatility in front-month VIX futures. The proposed approach starts by listing the monthly contracts, then defining a consistent roll rule, such as switching contracts a set number of trading days before expiry. Expiry dates and aligned historical prices are needed to identify when each switch occurs.
After choosing the roll schedule, the contracts can be combined into a synthetic continuous price series using geometric or arithmetic adjustments, working backward from the current contract. Returns calculated from that series represent a simulated strategy that holds the front month and rolls according to the chosen rule. The post also notes that some market data vendors provide such series. The explanation is conceptual rather than a full calculation example: it does not specify the exact adjustment convention or establish that a particular roll rule reproduces the paper’s measure. Those choices affect the resulting returns and realized variance.
Key ideas
- A continuous front-month return series requires a defined schedule of eligible futures contracts.
- A roll rule specifies when exposure moves from an expiring contract to the next one.
- Historical expiry and price data are needed to align contracts and locate roll dates.
- Adjusted synthetic prices can be used to calculate returns across successive contracts.
- The resulting returns describe a rolling futures strategy, and vendor-built series may be available.
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Full text
# Calculating front month VIX future returns # Calculating front month VIX future returns I'm currently reading a paper* which deals with seperating the volatility of volatility index (VVIX) into a physical measure of volatility of volatility (RVVIX) and a risk premium of v.o.v (VVRP). To do so, one has to: "RVVIX is obtained by computing the realized variance of the five-minute front-month VIX future returns over the past one month." - Does anyone know if this RRVIX data can be obtained somewhere or from a certain database (I couldn't find it) - Can anyone give me an explanation how to actually do those calculations, I'm really struggling to understand the process. E.g. "front month VIX future returns" means those are futures with the nearest expirations dates, but what futures exactly need to be considered (just because there are different prices and therefore different returns). I know this question is probably very basic and a bit vague (I'm only an undergrad student), but I appreciate any form of help or suggestions Thanks in advance ' Volatility-of-volatility and tail risk hedging returns, Yang Ho Park, 2013 ## Answer by ThatDataGuy (score 1) https://quant.stackexchange.com/a/54355 > but what futures exactly need to be considered (just because there are different prices and therefore different returns). The usual way to do this is: - draw a schedule / list of the contracts to be considered (in this case, all the monthly expries) - Create a rule for determining a relative point to switch from one contract to the next (eg, the expiry minus 2 trade days) - this is called a "roll algo" - For each contract pair, compute the roll point in time (you might need expiry reference data to do this) - align the historic market data for the future contracts - compute an adjusted time series using geometric or arithmetic factors, starting from today, and going backwards daily in time - Compute a returns series using the above synthetic price series This results in a returns series for the simulated trading strategy of owning the front month and rolling to the next expiry 2 days before the expiry etc. Many data providers (eg, bloomberg) already compute series like these to save you the effort.
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