Forecasting returns in the VIX futures market

This paper introduces a new forecasting model of VIX futures returns. The model is structural in nature, parsimonious and contains parameters that are relatively easy to estimate. Forecasts of next day VIX futures returns based on this model are superior to those produced by a linear forecasting model that uses the same set of predictors. Moreover, the profits to a market timing model based on the proposed forecasts are statistically and economically significant, and are robust to the method used to adjust for risk and to transaction costs (up to around 15 basis points). By contrast, the forecasts generated by the linear forecasting model are not.