Volatility Risks Implied From Short Term VIX Futures

We use a dynamic term structure model to extract latent volatility risk factors from short term VIX futures. While the first factor, closely related to the level of volatility, does not contain predictive information about VIX futures returns, the second and third risk factors can significantly predict daily and weekly returns of VIX futures. The predictive power of the third volatility factor is particularly strong: It is robust to controlling for other known predictors, considering different VIX futures contracts and return calculation, and alternative methods for evaluating statistical significance. We find the third volatility factor captures both changes in risk and movements in open interest