VIX Index Volatility Forecast (10/07/2011)

The VIX Index was expected to plummet and retest the 13% – 14.5% area. Needless to say that the projection we gave you one week ago proved accurate once again. The market opened at 16% rose to 16.3 on Wednesday and then plummeted to 15.9 where it remained for both Thursday and Friday despite the big drop in the underlying.

The current volatility is 4.3% (14.8% monthly) and the TGARCH plot is again showing a downward sloping curve which is almost at the end of its mean reverting process. The decrease in the VIX conditional variance will probably terminate at 4% (13.8% monthly) which constitutes the equilibrium point for the S&P500 implied volatility index.

It is worth noting that, like the VXN Index, the volatility did not increase even if the Non-Farm Payroll figures were quite bad and the underlying asset sharply dropped. However, the next trading days should see a shy decline in the conditional variance followed by an ulterior sideways movement.

The HyperVolatility team remains bearish the VIX Index because the plummeting volatility of the VIX itself should push the index further down in the 15% – 15.5% area and keep it there for the rest of the week.

Nevertheless, the proximity to the equilibrium point augments the probability of a mean reverting explosion which could occur at any time. Specifically, the warning signal should be generated if the VIX surpasses the 16.2% – 16.3% threshold.

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