Sowmi Krishnamurthy, CEO of SK Market Insights, describes a technique for deriving market signals from the term structure of VIX futures.
In his paper, published in the CMT’s Journal of Technical Analysis, Krishnamurthy shows how a linear model based on the first six-month futures can be used to approximate a reference term structure against which variances are measured. These variances, i.e. shifts in term structure, are then visualised and used as market signals.
Krishnamurthy illustrates how the market signals can be used in three trading scenarios: First, to clarify when to buy the S&P 500 following a spike in the VIX; second, to identify suitable entry points with positive one- and three-month returns following corrections in the S&P 500 of less than 10 percent; and third, to aid risk management.
Read the full paper here >>.