Forecasting the VIX to Improve VIX-Derivatives Trading

Sibyl-Working-Paper, April 2016

7 Pages Posted: 28 Apr 2016

Date Written: April 27, 2016

Abstract

Konstantinidi et. al. state in their broad survey of Volatility-Index forecasting: "The question whether the dynamics of implied volatility indices can be predicted has received little attention". The overall result of this and the quoted papers is: The VIX is too a very limited extend (R2 is typically 0.01) predictable, but the effect is economically not significant.

This paper confirms this finding if (and only if) the forecast horizon is limited to one day. But there is no practical need to do so. One can - and usually does - hold a VIX Future or Option several trading days. It is shown that a simple model has a highly significant predictive power over a longer time horizon. The forecasts improve realistic trading strategies.

Keywords: VIX Forecasts, VIX-Options, VIX-Futures

Suggested Citation

Donninger, Chrilly, Forecasting the VIX to Improve VIX-Derivatives Trading (April 27, 2016). Sibyl-Working-Paper, April 2016. Available at SSRN: https://ssrn.com/abstract=2771019 or http://dx.doi.org/10.2139/ssrn.2771019

Chrilly Donninger (Contact Author)

Nimzowerkstatt OEG ( email )

Altmelon 110
Arbesbach, Lower-Austria A-3925
Austria

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