Forecasting returns in the VIX futures market

This paper introduces a new forecasting model for VIX futures returns. The model is structural in nature and parsimonious, and contains parameters that are relatively easy to estimate. The 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 both the method used for adjusting for risk and transaction costs (up to around 15 basis points). In contrast, the forecasts generated by the linear forecasting model are not.