Investment Strategies with VIX and VSTOXX

VIX and VSTOXX derivatives have been the story of success in terms of product innovation over the last five years. In this paper we use historical data on S&P500 and EURO STOXX 50, VIX and VSTOXX, as well as VIX and VSTOXX Futures to reveal linkages between these important series that can be used by equity investors to generate alpha and protect their investments during turbulent times. We consider for comparative performance purposes investment portfolios in U.S. and EU zone and also a long-short cross border portfolio. The econometric analysis is spanned by a battery of GARCH models from which we have selected the GARCH (1,1), the EGARCH and the GJR model as the best models for our data. Overall, investors with EURO STOXX 50 exposure can improve greatly the performance of their portfolio by adding VSTOXX futures.