VIX Index Volatility Forecast (10/05/2011)

The implied volatility of the S&P500 was expected to rise and our previous week’s forecast proved to be as useful as accurate. In particular, the VIX Index opened at 15.9% rose to 17% on Wednesday and closed at 18.4% on Friday.

The actual volatility of the VIX Index is around 7% (24.2% in annual terms) and the TGARCH curve is now showing a situation which seems to be quite stable because the conditional variance did not rise that much.

Furthermore, the mean reverting process which is a characteristic feature of volatility movements will probably “influence” the curve itself and it will try to push the volatility of the VIX back to the equilibrium point which is stable at 4% – 4.5% (13.8% – 15.5% monthly).

The HyperVolatility team is bearish on the VIX Index because the large augment in volatility we saw the last week and the consequent drop in the underlying market are phenomena which seemed to have run out of steam.

The VIX Index should plunge over the next trading days and retest the 14.5% – 15% zone whilst the underlying market should rise in value because of the positive correlation between the VIX Index and its stochastic volatility measurement.

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