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German Bund Futures Volatility Forecast (03/04/2011)

The last week we forecasted a price drop towards the 120.5 – 121 euro and effectively so it was. German Bund futures opened at 121.8 and then sharply dropped at 121.15 euro on Friday.

However, the volatility plummeted to 0.36% (5.7% annualised) despite of what effectively happened in the market and once again the leverage effect has not been respected. Nonetheless, during our research, that is available on HyperVolatility Channel, we noticed that volatility in German Bund futures is much more reactive to price rallies than to market drops. Consequently, since the asymmetric process has not been respected and given the fact that the actual TGARCH curve is fairly close to its equilibrium level, which is around 0.33% (5.2% annualised), a potential rise in volatility could imply a recovery of the price.

The week ahead is probably going to be a choppy one but Bund futures prices should plummet to 120.5 euro and then get back up towards the 121.5 area. Therefore, we will place some shorts although we will wait for a clear sign of recovery before entering any long positions.

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