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Equity Volatility Indices: VIX, VXN, VXD, RVX

The present research will go through the most popular equity volatility indices proposed by the CBOE. The aim of the research is to identify how they fluctuate and to quantify the magnitude of their movements. The actual study will be followed by a second one entirely focused on commodity volatilities and the examined asset classes will be Gold and WTI Crude Oil (the HyperVolatility Forecast Service provides market projections for the VIX, Gold, WTI crude oil and many other asset classes. Send an email to info@hypervolatility.com and get a free 14 days trial). The great attention towards volatility indices and the remarkable popularity gained by VIX futures are surely undeniable but what is the risk involved in these markets? What is the volatility index that best fits your trading style and portfolio needs? Do you know how the VIX performs compared to other volatility indices? The HyperVolatility team trades and analyzes volatility movements on a daily basis on different asset classes and the present study is a summary of some of our findings. The examined data sample goes from January 2011 until April 2013 and the present research will examine 4 equity volatility indices: the VXN (Nasdaq 100), the VXD (Dow Jones), the RVX (Russell Index) and the VIX (S&P500). The first chart displays the distribution ranking of each index and it is a good approximation of how volatile the aforementioned indices can be:

Volatility Indices - Distribution Ranking

The graph clearly indicates that, on average, almost all indices move within the 18% – 22% interval (the RVX is the only one above this range as its median is 23.43%). The lowest fluctuations, for all indices, are concentrated within the 9% – 12% range (the VXD is the only index showing a figure lower than 10%) while the wildest volatility explosions tend to group around the 45% – 48% area (the RVX again is the only outsider with a 58.84% peak). Statistically speaking, the most important intervals to consider are the 25%, the median and the 75% ones because they represent the most common spectrum of oscillation. Consequently, in case of low volatility most of the indices will tend to move within the 15% – 18% range (the RVX does not go below 20% though) while in high volatility environments equity volatility indices will tend to oscillate between 20% and 24% (the RVX is again the only outsider with 28.1%). The RVX is definitely the index showing the highest figures, which is normal given the fact that it tracks the volatility of less liquid stocks, but is it really the most volatile one? The answer is no because the fact that the RVX has an average value of 23.43% does not mean that it experiences the highest degree of fluctuations; it simply implies that the RVX is constantly higher than the others. In order to clarify this issue it is necessary to quantify the magnitude of the equity volatility indices’ movements. The next chart displays the volatility of the volatility indices. This time, however, the oscillations are expressed in monthly volatility because the CBOE indices are already annualized:

Volatility of Volatility

The chart evidently shows that the most volatile equity index, amongst those proposed by the CBOE since 2011 so far, is the VIX and not the RVX. The second most volatile is the VXD and the least volatile is the RVX. How is this possible? Wasn’t the RVX the index showing the highest values? The explanation is simple. The VIX and VXD indices have a higher variability rate because a fairly good amount of moves tend to be large, fast and powerful. On the other hand, the RVX has a lower variability because it tends to fluctuate more often around its mean value and consequently the dispersion is lower. The next graph, which plots the ranking of the dispersion rate for the volatility of CBOE equity volatility indices, will help to expand more this concept:

Volatility of Volatility - Distribution Ranking

The graph confirms what previously stated: the VIX and the VXD are, on average, the most volatile indices. The 3rd index is the VXN while the RVX is the one that experiences the lowest degree of diffusion. The dispersion of the VIX and VXD is the largest even for small and large moves indicating that these 2 volatility indices move a lot more quickly than the others. Almost all indices do not go over the 30% threshold but when large market moves happen the monthly volatilities reach 50% and in some cases, like the VIX, 60%. To sum up, the VIX and VXD are the most volatile indices while the VXN and RVX ranked 3rd and 4th respectively (it is worth reminding that the sample analyzed goes from January 2011 until April 2013). Financial markets have different risk dimensions and equity volatility indices make no exception. The next table tries to provide empirical evidence to quantify 1 of those dimensions: the intraday risk

Intraday Risk

Before getting started it is important to point out that the numbers reported in the table are volatility points. The intraday risk, on average, is around 1.35% for all equity volatility indices but the RVX reaches 1.5%. On the other hand, the table suggests that very large market moves can push equity volatility indices up or down by 13%, 14% or 15% in one single day.

However, one question, given the above mentioned results, would be particularly appropriate: wasn’t the RVX the least volatile index? If that is true, how come the intraday risk is higher?

The RVX index is more “dangerous” than other volatility indices as far as intraday risk is concerned. Nevertheless, even if the RVX fluctuates more wildly during trading hours its mean reverting pressure is higher in the medium term. In other words, the RVX is fairly volatile on a daily basis but it tends to mean revert towards its mean much more quickly than other indices. Furthermore, violent volatility bursts or aggressive drops tend to counterbalance themselves more effectively and in the medium term they result in a lower dispersion of the RVX with respect to its mean. The aforementioned phenomena explain why the RVX has a higher value in terms of volatility points but it is generally less volatile than the VIX or the VXD.

Conclusions

1) On average all indices tend to oscillate within the 18% – 22% interval

2) In case of low volatility, indices will tend to move within the 15% – 18% range while in high volatility environments the equity volatility indices will likely oscillate between 20% and 24%

3) The RVX is definitely the index showing the highest value in terms of volatility points but it is the less volatile because the mean reverting pressure is higher in the medium term

4) The most volatile equity indices, amongst those proposed by the CBOE, are the VIX and the VXD

5) The dispersion rate for the VIX and VXD indices is the largest even for small and large moves which means that they oscillate more quickly and frequently than others

6) Intraday risk is around 1.35% for all equity volatility indices but the RVX reaches 1.5%

 The HyperVolatility Forecast Service enables you to receive statistical analysis and projections for 3 asset classes of your choice on a weekly basis. Every member can select up to 3 markets from the following list: E-Mini S&P500 futures, WTI Crude Oil futures, Euro futures, VIX Index, Gold futures, DAX futures, Treasury Bond futures, German Bund futures, Japanese Yen futures and FTSE/MIB futures.

Send us an email at info@hypervolatility.com with the list of the 3 asset classes you would like to receive the projections for and we will guarantee you a 14 day trial.

HyperVolatility Forecasts: BIG NEWS

Dear HyperVolatility readers,

we would like to inform you that the forecasting service is now carried on a personal basis only. Hence, if you want to receive market analysis based on quantitative methods and statistics in order to support your investment decisions please do not hesitate to send us an email at hypervolatility@gmail.com and let us know which asset class you would like to receive the projections for. You can choose up to 3 markets from the following list:

1) VIX Index

2) E-Mini S&P500 Futures

3) Crude Oil Futures

4) Gold Futures

5) German Bund Futures

6) Treasury Bond Futures (30 years)

7) DAX Futures

8) FTSE/MIB Futures

9) Euro Futures

10) Japanese Yen Futures

You will receive 1 report every week containing the statistical analysis, which will be explained to you in details, for the 3 markets of your choice.

Are you tired of reading the same non-sensical market commentaries? do you want to know how volatile the market and your portfolio are going to be in the next week? are you looking for a more scientific approach to investing and trading?

if you answered YES to these questions we are probably a good match for you

The studies we provide are extremely useful for both futures and options traders therefore everyone can benefit from our researches.

Remember that our approach does not consist in interpreting the market according to our view of things but in LETTING THE DATA SPEAK

The service will become fee-based in a couple of months time but we guarantee you a 2 free months membership from the moment you sign up with us. You will not be forced to upgrade to the fee-based service and there are no legal commitments.

In other words, you will receive a total of 8 reports containing 24 analysis and forecasts related to the asset classes you chose completely free of charge.

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HyperVolatility – End of the Year Report 2011

Dear All, we are pleased to announce you that the HyperVolatility End of the Year Report 2011 has been finally completed and it can be downloaded for free by clicking the following link:

HYPERVOLATILITY END OF THE YEAR REPORT 2011

In the first part, the study is focused on equity markets, currency and commodity futures. Each analysis is divided into 2 parts: in the first one we go through the overall performance of the particular asset under examination whilst in the second one we focus on intraday and close-to-close volatilities which have been calculated using the TGARCH model.

The second part is entirely centred on the macroeconomic factors and their influence on financial markets. We try to pull together the big picture by singularly studying the most important exogenous variables which affected financial prices over the 2011. This examination has been carried on the major economies in the world in order to keep an eye on the global status of the economy.

Please read carefully our Legal Disclaimer. To give you an idea of what you can expect we report here the table of contents:

1) Legal Disclaimer; 2) Euro Futures; 3) British Pound Futures; 4) Swiss Franc Futures; 5) Japanese Yen Futures; 6) (WTI) E-Mini Crude Oil Futures; 7) Gold 100 Futures; 8) Yen, Australian Dollars and Commodities; 9) DJ EuroStoxx50 Futures; 10) E- Mini S&P500 Futures; 11) German Bund Futures; 12) Correlation Matrix Analysis; 13) Correlation Matrix Appendix; 14) Unemployment Rate; 15)Inflation Rate; 16) Gross Domestic Product; 17) Debt to GDP; 18) BRIC Economies: a brief summary; 19) Macroeconomic Data

HyperVolatility is back

Dear readers,

We do apologise for the interruption in the service but the increased amount of work we had to cope with prevented us from posting analysis on a weekly basis.

HOWEVER, IT IS IMPORTANT TO POINT OUT THAT WE ARE BACK AND THAT THE ANALYSIS WILL BE POSTED SHORTLY EVEN IF SOME CHANGES WILL BE MADE.

Change #1 ) The forecasts will be showed only in a numerical form.Ergo, we will post the actual value of the index/commodity/currency along with its volatility without writing the entire article but YOU WILL GET THE FORECASTED VALUE OF THE ASSET AND ITS VOLATILITY ANYWAY.

Change #2) You will get more reports and researches. All the analysis will be based upon quantitative methods and therefore there will be no discretionary work involved in it.We will post them in a PDF format on our blog and they will be downloadable at any time and free of charge.

Change #3) Since January 2012 onwards there will be a new page called “HyperVolatility Performance” where we will track the reliability of our forecasts and their profitability. Be aware that we will give you a range within which the price is likely to fall , like we have always done, rather than suggesting a single future forecast. We always provided a forecast range because it is very useful when placing profit taking  or stop losses targets and for this reason we will continue to do so. The “HyperVolatility Performance” page will show the rate of return for each asset and the total profitability of an hypothetical portfolio “HyperVolatility Portfolio” constructed by using each market considered in our analysis.

CHRISTMAS PRESENT AND CELEBRATING THE FIRST YEAR OF WWW. HYPERVOLATILITY.COM  

We all are very grateful for your support and kind words and we will try, as much as we can, to keep the website updated. The first year of HyperVolatility has been a very intense one and a lot of work and time have been put into this project but it was worthwile because the number of readers increased to a rate that would have been very difficult to imagine one year ago:thank you!!!

We are now working on a project which will be published in a couple of weeks. The research is called “HyperVolatility End of Year Report 2011” and its aim is to provide you with a general understanding of what happened over the last 12 months. In other words, we are trying to put the big picture together for you. The project will cover all the markets that we currently analyse in a 1-by-1 mode in addition to a final overview of the macroeconomic factors that influenced the price action in 2011.

THE HYPERVOLATILITY END OF YEAR REPORT 2011 WILL BE PUBLISHED IN A PDF FORMAT. SHOULD YOU NEED A WORD FORMAT PLEASE SEND US AN EMAIL AT HYPERVOLATILITY@GMAIL.COM IN ORDER TO REQUEST ONE.

IT IS ALWAYS WORTH REMINDING THAT ALL OUR ANALYSIS AND TRADES ARE ASSUMED TO BE IN A SIMULATED ENVIRONMENT AND NO FINANCIAL RECOMMENDATION IS INTENDED. YOU TAKE FULL RESPONSABILITY FOR YOUR OWN FINANCIAL DECISIONS AND WE TAKE NO RESPONSABILITY FOR YOUR TRADING PERFORMANCE.

PLEASE READ OUR LEGAL DISCLAIMER CAREFULLY TO KNOW MORE.

THANK YOU VERY MUCH FOR YOUR SUPPORT ONCE AGAIN.

The HyperVolatility Team

E-Mini S&P500 Futures Volatility Forecast (05/10/2011)

E-Mini S&P500 futures opened at 1,158 on Monday, achieved 1,170 on Tuesday, plummeted to 1,149 on Wednesday, and rose to 1,157 on Thursday but on Friday the price dropped to 1,122 in the last minutes of the trading session.

The current volatility is 2% (31.7% annualised) and the plot is still showing a volatility curve which is trading at very high levels but now moving laterally with a shy downward sloping tendency.

The conditional variance is indeed very high but it is likely that the mean reverting process will start to become more and more “heavy” meaning that the volatility curve will probably tend to mean revert towards the next hours even if it will be unlikely to see a full and complete return to the long term equilibrium point.

The HyperVolatility team is bullish E-Mini S&P500 futures because the softening of the oscillation rate should support the price action which could potentially achieve the 1,180 – 1,200 area by Friday.

Nevertheless, unexpected bad news could drag futures prices back down and this time, should this happen, a retesting of the 1,000 support would be almost inevitable.

VIX Index Volatility Forecast (05/10/2011)

The VIX index opened at 39% on Monday, dropped to 37.7 on Tuesday, climbed to 41 on Wednesday, plummeted to 38.8 on Thursday and closed to 42.9 on Friday.

The volatility is around the 7.8% – 8% level (26.6% – 27.7% monthly) and the TGARCH chart is now displaying a volatility curve which is primarily moving sideways even if it is still very close to the 4% (13.8% monthly) long term equilibrium point. The actual situation of the VIX is neither indicating panic nor greed but uncertainty and indecision because many investors are not really sure which way the price is going to head to. Additionally, most of the uncertainty has been caused by both European and American politicians who keep promising new and robust policies to tackle the crises but are not implementing them.

The HyperVolatility team is bearish the VIX index because the stochastic volatility of the S&P500 implied volatility index is not giving any signal of potential bursts. As a consequence, we believe that the high volatility levels at which the VIX is currently trading will not hold for long implying that we could have a closing around the 38% – 39% by Friday.

However, a further round of sell-offs would push the VIX even higher and given the panic surrounding financial markets readings around the 48% – 50% could be easily achieved.

E-Mini Nasdaq Futures Volatility Forecast (05/10/2011)

E-Mini Nasdaq futures opened at 2,227 on Monday, touched 2,254 on Tuesday, dropped to 2,220 on Wednesday, settled around 2,192 on Thursday and closed at 2,123 on Friday.

The current volatility is 1.7% (26.9% annualised) and the TGARCH plot is now showing an upward sloping curve which is suggesting that further market swings could be expected in the upcoming days. However, this level has been hardly violated in the past and it is reasonable to guess that a retracement of the volatility curve will occur.

The HyperVolatility team is moderately bullish E-Mini Nasdaq futures because the conditional variance should plunge and favour a recovery of the price action which could eventually retest the 2,300 threshold by Friday.

 

DJ EuroStoxx50 Futures Volatility Forecast (05/10/2011)

DJ EuroStoxx50 futures opened at 2,097 on Monday, touched 2,163 on Tuesday, plunged to 2,138 on Wednesday, rose to 2,203 on Thursday and retraced to 2,148 on Friday.

The volatility is around 2.5% (39.6% in annual terms) and the TGARCH plot is manifestly displaying a downward sloping curve which seems now ready to start its mean reverting journey towards the medium term equilibrium point which is set around the 1.2% threshold ( 19% annualised).

It is worth noting that this is the first time in 2 months that the volatility curve manages to break through the 2.7% support (42.8% in annual terms) implying that, although some short term retracements are almost inevitable, the conditional variance should probably keep plummeting over the next hours.

The situation in Europe is far from being rosy but some encouraging words are being heard from European politicians which are trying to secure banks exposed to Greece CDS.

The HyperVolatility team is moderately bullish DJ EuroStoxx50 futures because the softening oscillation rate should back the price action that could potentially settle around the 2,220 area before Friday, news permitting.

German Bund Futures Volatility Forecast (05/10/2011)

German Bund futures opened at 136.9 on Monday, dropped to 135.9 on Tuesday, touched 135.6 on Wednesday, settled to 135.7 on Thursday and jumped back up to 136.7 on Friday.

The current volatility is 0.42% (6.6% annualised) and the TGARCH plot is now showing a downward sloping curve which is now trading close to its mean reverting point. The actual situation could lead to 2 different scenarios: the conditional variance spikes again after having touched the 0.4% support (6.3% in annual terms) or it keeps fluctuating laterally until the end of the week.

The probable scenario is half a way through the two just mentioned. In particular, the volatility is likely to increase in the very short term (read the first half of the week) whilst the second half should see a softening of market swings.

The HyperVolatility team is moderately bearish German Bund futures because, despite a probable retest of the 138.5 area in the first 3 days of the week, the price action should head south and eventually touch the 133 – 134 area by the end of the week.

Needless to say that unexpected bad news would push the price back up to 139 but, everything else being equal, we should have a diminishing in the buying pressure.

E-Mini Crude Oil Futures Volatility Forecast (05/10/2011)

E-Mini Crude Oil futures opened at 81.2 on Monday, rose to 83.6 on Tuesday, sharply dropped to 80.8 on Wednesday, jumped back to 82.8 on Thursday and plummeted to 78.6 on Friday.

The actual volatility is 2.3% (36.5% in annual terms) whilst the plot is displaying a downward sloping volatility curve which should keep plummeting over the next trading days although the mean reverting point is not that far from current levels.

It is worth pointing out that oil prices are not mirroring their “fundamental reasons” anymore but are entirely driven by macroeconomics events and the great drop of the Single currency had a massive impact on E-Mini Crude Oil futures prices.

The HyperVolatility team is moderately bullish this market because a short term recovery of the Euro against the US dollar, the extremely cheap oil prices and a softening volatility curve should back the price action which could eventually retest the $ 80 threshold by Friday.

A further plunge in the Euro vs Dollar exchange rate would irremediably drag E-Mini Crude Oil futures prices down in the $ 73 area.

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