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

The last week we were bearish German Bund futures but the substantial drop experienced by both equity indices and commodity markets obliged many investors and traders to protect their portfolios by going long the German based fixed income product. In fact, the market opened at 122.8 euro dropped to 112.3 but it suddenly rose to 123.7 euro on Friday.

The actual volatility is around 0.41% (6.5% annualised) but the plot is displaying a positive correlation between the price burst, we previously mentioned, and the volatility itself. Needless to say that such a “coincidence” is quite suspicious and should be carefully observed.

The TGARCH curve is now downward sloping and it would seem that the upcoming days will see a decreasing rate of market fluctuations, which would normally back a recovery of the price, but not in this case. Particularly, the augment in volatility caused by an increasing price is a hidden signal of market instability implying that during the rally the correlations amongst market orders was very close to 0 and many investors sold rather going long.

The HyperVolatility team remains bearish on German Bund futures because the plummet in the conditional variance is going to push futures prices down. Consequently, we will place some shorts because we believe that the 121 – 121.5 area will retested again before the end of the week.

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