As in the VIX index spot, the S&P 500 VIX Futures Index Series and the S&P 500 tend to move in opposite directions or. As shown in Exhibit 1, while the correlation between the spot VIX and the futures index series is not perfect, it is a healthy 89% for the short-term index and 80% for the mid-term index. More importantly, the correlations of the short-term index and mid-term index to the S&P 500 are -80% and -78%, respectively, closely approximating the -77% correlation of spot VIX with the S&P 500.
Exhibit 1: Correlation of Indices with VIX and the S&P 500 (Dec. 2005 – Dec. 2011)
VSTOXX Short Term Futures Index and VSTOXX Mid Term Futures Index are calculated since late 2010. Despite their short history, they demonstrate high correlation with VSTOXX spot and high negative correlation with EURO STOXX 50. VSTOXX Short Term Futures Index is 85% correlated with VSTOXX and -85% correlated with EURO STOXX 50 since September 2010. VSTOXX Mid Term Futures Index is 81% correlated with VSTOXX and -86% correlated with EURO STOXX 50 since November 2010.
Exhibit 2 below shows that daily falls in the S&P 500 are highly likely to be accompanied by rises in the VIX spot and the two VIX futures indices.
Exhibit 2: Probability of VIX Rises Given Particular S&P 500 Falls (Dec. 2005 – Dec. 2011)
Particularly during periods of market stress, the rise in the two VIX futures indices is substantial, as shown in Exhibit 3. Exhibit 4 shows the diversity property holds in Europe.
Exhibit 3: 20 Biggest Daily S&P 500 Falls from Dec. 2005 to Dec. 2011
Exhibit 4: 10 Biggest Daily EURO STOXX 50 Falls in 2011