What the Front End of the VIX Curve Knows
The Predictive Information Embedded in VIX Inversion
It has long been known that the shape of the VIX term structure contains information beyond the VIX level itself. When short-dated implied volatility spikes above longer-dated implied volatility, the market may be signaling not only higher uncertainty but also an imminent volatility shock.
Researchers have long used the slope of the VIX curve as a regime indicator and tactical filter for equity exposure. In a previous post, I explored a related idea by using bond market implied volatility as a cross-asset signal for forecasting shifts in the VIX complex.
But a more interesting question is whether the magnitude of the inversion matters. Not just whether the curve has inverted, but how sharply, and whether the very front end of the curve contains information that the conventional short-to-medium slope misses.
Recent research suggests the answer is yes. The magnitude of front-end VIX curve inversion appears to contain incremental information about future realized volatility, even after controlling for the VIX level itself and standard HAR-style models of volatility persistence.
In this post, I replicate the latest research findings on independent data and discuss what they imply for anyone using the VIX term structure as a volatility or risk signal.
