In late February and early March 2020, VIX futures prices were too low and observably undervalued in real time, even as COVID-19 pandemic risks were growing. An investor who traded based on real time signals of undervaluation would have earned significant trading profits by taking a long position in VIX futures in late February and holding it over March as the VIX reached record highs. The underreaction of VIX futures prices to growing risks was a vivid example of broader patterns in the VIX futures market. A trading strategy based on the proposed valuation signal generates positive risk adjusted returns.
Ing-Haw Cheng is Associate Professor of Business Administration at the Tuck School of Business, Dartmouth College. He has published in leading journals such as the American Economic Review, Journal of Finance, and Review of Financial Studies. Prior to Tuck, Professor Cheng was a professor at the University of Michigan and a consultant at Deloitte Consulting. He received his PhD in Economics from Princeton University in 2009. His research spans several topics including the pricing of volatility derivatives, the financialisation of commodity futures, and behavioural biases in belief formation.