If your interests are related to the simulation / backtest of volatility exchange-traded products like VXX and XIV, then you should review the products I have listed here. While the indexes discussed in this post can be used to compute the prices of the volatility ETPs it is not an entirely straightforward process.
I have generated both the Excess Return (ER) and Total Returns (TR) trading day values for the following rolling indexes of VIX volatility futures starting on March 26, 2004 through December 12, 2014.
- Month 1-2 rolling indexes, constant weighted average 1 month (Similar to SPVXSTR and SPVXSP)
- Month 2-3 rolling indexes, constant weighted average 2 months
- Month 3 -4 rolling indexes, constant weighted average 3 months
- Month 4-5 rolling indexes, constant weighted average 4 months
- Month 4-5-6-7 rolling indexes, constant weighted average 5 months (Similar to SPVXMTR and SPVXMP) This is considered the “Midterm” maturity.
These indexes, or ones like them are required if you want to backtest various ETP products or evaluate your own volatility strategy.
These rolling indexes don’t exactly match the official indexes (SPVXSTR, SPVXSP, SPVIX2MT, SPVIX3MT, SPVIX4MT, SPVXMP, and SPVXMTR), but when I compare my results to the values available on Bloomberg my results track within +-0.03% for the values I have sampled from December 2008 to December 2011 for each of the indexes. See this readme file for more information on accuracy comparisons. The official indexes start on December 20th, 2005, but I pushed them back to the beginning of VIX volatility futures trading which was in March 2004 by extrapolating mssing front month data.
In working through the details of the algorithms there were no major surprises, but there were some subtleties—like discovering the market was closed on January 2, 2007 to commemorate President Reagan. One significant detail is that the day-to-day rolling of the futures is done on a dollar-weighted basis. For example on the rolling 1 to 2 month index, if there are a total of 21 trading days in the current first-month futures, it is not 1/21 of the contracts that are rolled over to the second month each day—it’s 1/21th of the dollar value of the index that is rolled over. The reason for this distinction is that the goal of the index is to give a constant duration or maturity (e.g., 2 months), if the roll amount isn’t dollar-weighted then contango/backwardation would shift that duration one way or the other.