DJ EuroStoxx50 Futures Volatility Forecast (27/06/2011)

The last week we were bullish DJ EuroStoxx50 futures and the fact that the market opened at 2,754 and immediately rallied to 2,810 on Tuesday, even if it plunged over the rest of the week, is the proof that our initial analysis was correct but the bad macroeconomics news which hit the market, completely changed the scenario. In fact, futures prices sharply plummeted to 2,786 on Wednesday touched 2,758 on Thursday and settled at 2,716 on Friday.

The volatility is now 1.1% (17.4% annualised) and the TGARCH plot is displaying an upward sloping curve which seems to suggest that an increase in the conditional variance should be expected over the next trading days.

On the other hand, it seems that the catalyst which caused the price drop, that is global news, is not going to influence the price action for a prolonged period of time and that is why it is reasonable to believe that the volatility will increase in the first half of the week but it will then drop and mean revert towards the 0.8% level (12.6% annualised).

The HyperVolatility team remains moderately bullish on DJ EuroStoxx50 futures because the decrease of market volatility should back the price action and favour a recovery of futures which should retest the 2,800 resistance by Friday.

Nevertheless, we will probably enter the market in the second half of the week because the short term explosion of market variance should continue over the next 2 days before starting to mean revert.

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