Backtest: Comparing the VIX and VXV Indices

This is a test of another common strategy for trading VIX ETPs like XIV and VXX: comparing the VIX index to the longer-dated VXV index. Traders often use this simple approach to judge whether the VIX futures term-structure is in contango (favoring XIV) or backwardation (favoring VXX).

Strategy results trading XIV (inverse volatility) and VXX (long volatility) are in blue, compared to buying and holding XIV in grey, from mid-2004 to present:

20140318.ST_Equity-Curve

Strategy rules:

Go long XIV at today’s close if the VIX index will close below the VXV index, or go long VXX if it will close above. Hold until a change in position. Read about test assumptions.

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Note the similarity in this strategy’s results to our previous test comparing first and second month futures; poor performance during the 2007/08 bear market, and more importantly, poor performance over the last 1+ year.

Monthly r2 between these two strategies = 75%, meaning these two strategies might not make as good of confirming indicators to each other as say our test comparing the VIX to front month futures, where the strategy produced a much more unique equity curve.

In a follow up post, I’ll expand on this strategy by testing a variation from VIX & More and Six Figure Investing that only trades XIV/VXX when the VIX:VXV ratio is sufficiently low or high.

20140318.ST_Stats

20140318.ST_Drawdown-Curve

20140318.ST_Periodic-Returns

When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy’s signal; it just serves to add a little color to the daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.

Good Trading,
Volatility Made Simple

Posted in Strategy Backtests.