Convergence Risk: The Problem With The New VIX Futures

The authors examine the issue of non-convergence of the VIX futures to the cash VIX, the associated expiration day effects, and their sources. Significant disparities are found between the value of the cash VIX and the VIX futures at settlement of the contract. The reasons for this difference include the settlement procedure of the exchange and the underlying S&P 500 options order imbalances at settlement, the latter affected by traders unwinding arbitrage positions. They propose an alternative settlement procedure that mitigates these problems.