Jun 15, 2010

Forecasting VIX

June futures and options are set to expire tomorrow at the open, but the million dollar question is where will July futures expire. Of course no one knows the answer - there are 35 trading days until July expiration, and anything can happen. However, judging from market data traders think that VIX will be at 28.50 +/- 7.56. I (respectfully) disagree. Over the weekend I started working on a technical forecasting model for the VIX. The model uses power transform to normalize VIX history, and AR-type model that I successfully use for forecasting equity options. I bootstrap over models and use residuals for Monte-Carlo estimate of expected VIX values.

I'm still ironing out the kinks, so I won't be putting on any trades at this time, but the forecasts are here - I expect the VIX to expire at 26.58 +/- 5.86. The plot is a histogram of expected values.

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