Modelling and trading the U.S. implied volatility indices: evidence from the VIX, VXN and VXD indices

Psaradellis, I. and Sermpinis, G. (2016) Modelling and trading the U.S. implied volatility indices: evidence from the VIX, VXN and VXD indices. International Journal of Forecasting, 32(4), pp. 1268-1283. (doi:10.1016/j.ijforecast.2016.05.004)

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Abstract

This paper concentrates on the modelling and trading of three daily market implied volatility indices issued on the Chicago Board Options Exchange (CBOE) using evolving combinations of prominent autoregressive and emerging heuristics models, with the aims of introducing an algorithm that provides a better approximation of the most popular U.S. volatility indices than those that have already been presented in the literature and determining whether there is the ability to produce profitable trading strategies. A heterogeneous autoregressive process (HAR) is combined with a genetic algorithm–support vector regression (GASVR) model in two hybrid algorithms. The algorithms’ statistical performances are benchmarked against the best forecasters on the VIX, VXN and VXD volatility indices. The trading performances of the forecasts are evaluated through a trading simulation based on VIX and VXN futures contracts, as well as on the VXZ exchange traded note based on the S&P 500 VIX mid-term futures index. Our findings indicate the existence of strong nonlinearities in all indices examined, while the GASVR algorithm improves the statistical significance of the HAR processes. The trading performances of the hybrid models reveal the possibility of economically significant profits.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Sermpinis, Dr Georgios
Authors: Psaradellis, I., and Sermpinis, G.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:International Journal of Forecasting
Publisher:Elsevier
ISSN:0169-2070
ISSN (Online):1872-8200
Published Online:17 August 2016
Copyright Holders:Copyright © 2016 Elsevier
First Published:First published in International Journal of Forecasting 32(4):1268-1283
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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