Trading Signals In VIX Futures
This work addresses trading optimization for VIX futures investors, but it appears incremental as it combines existing models without clear SOTA gains.
The authors tackled the problem of trading VIX futures by proposing a strategy that uses a Markov model and deep neural network to maximize expected utility based on the term structure, resulting in reasonable portfolio performance with positions that vary between long and short depending on market conditions.
We propose a new approach for trading VIX futures. We assume that the term structure of VIX futures follows a Markov model. Our trading strategy selects a position in VIX futures by maximizing the expected utility for a day-ahead horizon given the current shape and level of the term structure. Computationally, we model the functional dependence between the VIX futures curve, the VIX futures positions, and the expected utility as a deep neural network with five hidden layers. Out-of-sample backtests of the VIX futures trading strategy suggest that this approach gives rise to reasonable portfolio performance, and to positions in which the investor will be either long or short VIX futures contracts depending on the market environment.