Vix curve implies a ‘systematically important shock event’

"As the Vix and More blog duly noted last Friday, not only has spot Vix been spiking in its own right (last print seen around the 40 mark on Monday), the entire Vix term structure has flipped into backwardation over the last 10 trading days:



Furthermore, the latest data from the CBOE shows the backwardation has only intensified over the weekend:



So how important a development is this?

To find out we inquired with Christopher Cole, managing partner at Artemis Capital Management — a volatility focused hedge fund. Readers might remember Cole from his “The great vega short” and “Is volatility broken?” research notes on volatility.

Cole explains it simply. Using statistics.

As he explained to FT Alphaville:

In regard to VIX futures curve backwardization since 2004 the front two contracts of the VIX futures curve have traded at a discount to spot VIX approximately 25% of the time. Currently the entire VIX futures curve shows inversion and this shape has only occurred 13% of the time since 2004. Negative convexity across the entire curve usually only occurs during systematically important shock events such as the 2008 financial crash, Bear Stearns bankruptcy, 2010 flash crash, and the 2007 credit market meltdown..."

at  http://ftalphaville.ft.com/blog/2011/08/08/646826/vix-curve-implies-a-systematically-important-shock-event/