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E-Mini S&P500 Futures Volatility Forecast (06/09/2011)

E-Mini S&P500 futures opened at 1,208 on Monday, tested the 1,204 level on Tuesday, achieved 1,219 on Wednesday, plunged to 1,201 on Thursday and closed at 1,169 on Friday.

The actual volatility is 1.52% (24.1% annualised) and the TGARCH plot is evidently displaying an upward sloping curve which seems suggesting that an ulterior augment in the oscillation rate should be expected over the next trading days. Obviously, last Friday’s market drop considerably influenced the fluctuations rate but it is worth pointing out that the mean reverting speed started to decrease well before Friday. Should the market keep plummeting we could see readings around the 2.5% (39.6% in annual terms) by Friday again.

The HyperVolatility team is bearish E-Mini S&P500 futures because the expected increase in the conditional variance is going to drag the price action back down into the 1,110 area by Friday.

It is worth pointing out that the situation could completely change should Obama or Bernanke announce a new fiscal/monetary stimulus package because many investors who got burnt after the August sell-off would probably get back to buy equities or increase their exposure to risky markets.

2 Responses to E-Mini S&P500 Futures Volatility Forecast (06/09/2011)

  1. Can you please define conditional variance? Just how the Vol of Vol is going to change as a function of price? IE Price falls, vol of vol spikes but price rise = vol of vol drop.

    Also any recommended reading on understanding TGARCH? I see that its a key model for you but am not familiar.

    • Conditional variance means that the volatility when explodes will tend to reach a certain point and then collapse towards its long term average. In other words, big shocks are going to be followed by other big shocks and vice versa until the process does not find an equilibrium. Usually but it is not always the case, a spike in volatility tend to accompany a drop of the price action (particularly true in equity markets) whilst a collapse of the variance could mean a further rise of the price. The vol of vol is an important factor to look at but it depends on the underlying asset. If you look at the volatility of the VIX you will find that the volatility of the S&P500 implied volatility follows a symmetric effect.
      Regarding the TGARCH. Have a look at the Volatile Reading link of our blog but there is plenty of material on google and a lot of academic papers that you could look at. Also, google “the volatility lab” it is a useful website for those willing to understand GARCH models.
      Thank you very much for reading our blog and we do apologise for the late reply.
      Kind Regards,
      the HyperVolatility team

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