Variance Forecast Performance Measures : An Economic Approach ∗

This paper introduces an economically motivated performance measure for variance forecasts based on variance trading. The performance measure is constructed within a microeconomic framework that mimics the decision-making process of a variance trader who uses volatility forecasts to predict future profitability of a trade. The new performance measure can serve as a useful complement to more traditional statistical criteria, by focusing on the economic value contained in variance forecasts.