Derivatives pricing when supply and demand matter: Evidence from the term structure of VIX futures

We decompose the VIX futures term structure into systematic components driving the VIX and idiosyncratic components reflecting demand by various types of futures end-users. We model two distinct channels by which trading activity manifests itself into futures prices: a contemporaneous “level effect” across the term structure due to the aggregate size of nondealer net demand and a mean-reverting “roll effect” due to large trades in specific contracts. The observed futures term structure was, on average, higher and steeper than it would have been in the absence of the observed nondealer demand, but the impact varies in sign and magnitude over time.