German Bund Futures Volatility Forecast (18/04/2011)

The last week we forecasted a bearish price movement which would have turned into a bullish market if the volatility had remained stable. Though, the volatility plot displays a sharp explosion of the conditional variance which accompanied a boost of Bund futures from 119.9 to 120.7 euro.

The actual TGARCH curve is showing a mean reverting process whose value is close to 0.38% (6.03% annualised) and it is quite likely that over the next trading days the conditional variance will keep diminishing. As a consequence, the German Bund could rise once again because the volatility curve will try to get back into the 0.34%area (5.3% in annual terms).

There might be a bit of a sideways play or even a short term drop of futures prices because the volatility will try to “adjust itself” but the overall week should manifest a further bullish price move which could touch the 121 – 122 euro by the next Friday.

The HyperVolatility team is bullish on German Bund futures and we will place some longs as soon as volatility is going to collapse but unexpected good macroeconomics news will obligate us to close out our longs.

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