German Bund Futures Volatility Forecast (17/10/2010)

The German Bund is probably one of the most important markets to analyse in order to understand how economy is improving.

The TGARCH volatility showed a downward movement despite the sideways trading experienced in this market from the beginning of October so far.              However, an increase of  the conditional standard deviation is clearly kicking in even if, given the drop that the price lately had to 130 euro, the rise should have been much higher.

It is important to say that the last friday was the 3rd Friday of the month when futures contracts expire, hence, the drop in price is likely to be due to the  liquidation of long positions before the delivery date.

The volatility continues to be suspiciously low for such a down movement and therefore we believe that we are looking at a short-term correction before the final rally. The volatility should remain stable at 0.35% in the long run but a sharp rise due to a steep upward move is quite likely to happen

DJ EuroStoxx50 Futures Volatility Forecast (17/10/2010)

This week the DJ EuroStoxx50 Futures experienced an upward movement which brought the Index to 2800. This is the highest price since the beginning of the 2010 and it seems the market wants to test this level once again (the first time the market achieved this level was at the beginning of August).

The TGARCH volatility keeps showing an extreme downtrend. This week the volatility is as low as 0.8%. At the end of the chart there seems to be a weak attempt to correct the trend but the macro economic data released this week will reveal the real trend.

The staff of HyperVolatility remains quite sceptical about the effective strenght of the current rally. Volatility is a mean-reverting instrument, hence, either a double dip or a downward correction should be expected.

EUR/USD Futures Volatility Forecast (13/10/2010)

The Euro vs Dollar Futures traded in Chicago provide investors and traders with information regarding the future fluctuation of the EUR/USD spot market.                     The TGARCH volatility chart plots a “curious” development of the conditional standard deviation. Clearly, the average volatility experienced by this market is around 0.6% and it remained stable over the last 5 months although in June there was a sharp drop which happened to coincide with the lowest value of the Euro against the Dollar (around 1,22). It is important to notice that a decline in volatility estimation should usually drive the market down but this was not the case and such a signal should have been interpreted as a warning. In fact, since then the price dispersion was quite limited within narrow boundaries backing the bulls ,however, a rise in conditional variance is probable to occur. Consequently, a depreciation of the Euro against the Dollar should be expected in the near future.

E-Mini Crude Oil Futures Volatility Forecast (12/10/2010)

The Crude Oil futures market is one of the most heavily traded markets in the world and, given its correlation with stock Indexes, it is necessary to understand how its next fluctuations are going to be like.

Usually, the crude oil cycle is quite simple:prices rises from March until September and then decreases from that point until December.

However, the TGARCH volatility seems to suggest a steady bullish trend because the estimation remains stable around 15%. Nevertheless, such an ex-ante forecast should alert all traders and investors because a rise in volatility is highly probable.

Furthermore, the crude oil futures market recently became extremely asymmetric that is the difference between a bullish and bearish volatility is rather big. Consequently, the aforementioned drop in the TGARCH chart should be interpreted like a warning that bears are about to kick in the market, hence, it is time to:

1) Get rid of long positions

2) Bank profits

3)Enter a new short position as soon as price action gives a clear signal of a bear movement

E-Mini S&P500 Futures Volatility Forecast (12/10/2010)

The E-Mini S&P500 futures Index has a great inverse correlation with the German Bund.In other words, if the first goes down the 2nd goes up and vice versa. Therefore, if we were talking about an abvious buying opportunity in the Bund futures market, the chart on the left VISIBLY suggests that a selling climax is going to happen in the S&P500.

Watch out, stormy weather is expected !!!!

The TGARCH volatility touched a ridiculously low level at 0.1%  and it is reasonable to believe that the E-Mini S&P500 has reached its top and it is now ready for a retracement which seems to be quite consistent (given the velocity the volatility droppped).

The last part of the chart suggests that the down movement is already on is way and the great uncertainty surrounding the financial recovery helps feeding such theory although classical technical analysis still highlights a bullish trend.

However, time series analysis and stochastic volatility measurements performed on larger samples confirm the fact that the bullish move is running out of steam and bears are getting back into the game.

DJ EuroStoxx50 Futures Volatility Forecast (12/10/2010)

The DJ EuroStoxx50 Futures Index is a very good proxy for analysing European’s financial situation.  Clearly, the TGARCH volatility constantly decreased in the last 5 months signalling that probably the up movement could soon come to an end.

As stated in many academic researches, stochastic volatility is mean reverting and most of time an increase in volatility is registered  when there is a drop in the market.

Therefore, an augment in volatility would, in this case, bring the market down.   Such a hypothesis seems to be confirmed by the fact that the TGARCH estimations are drammatically low ,in fact, they ranged between 1% and 1.5% over the last 5 months and a further drop appear to be quite far from happening.

German Bund Futures Volatility Forecast (12/10/2010)

The German Bund futures is considered to be one of the safest asset in the world. Such a reputation comes from the great stability that the Germany economy has. Therefore, a rise in the price of bund futures indirectly suggests that investors and traders are not anymore willing to put their money into stocks.

As we can see from the chart on the left the TGARCH volatility (assumed with a generalised error distribution) appears to be EXTREMELY LOW .Specifically, since the volatility is mean-reverting it is reasonable to believe that soon there will be a rise which will drive, more probably, the market down. However, the German bund,given the current economic environment, is still a popular asset amongst investors and therefore it would not be surprising to see a prolonged low volatility period.

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