VIX Index Volatility Forecast (13/06/2011)

The VIX was expected to rise in value and the big gap up between the 3rd of June closing and the 6th of June opening proved our forecast were correct. The market opened at 18.4% dropped to 18% on Tuesday, rallied to 18.7% on Wednesday whilst it plummeted once again to 17.7% on Thursday and closed to 18.8% on Friday.

The volatility is now at 6.8% (23.5% monthly) and the plot is displaying a curve which is “about” to hit its equilibrium point at 4.5% (15.5% monthly) and consequently to terminate the mean reverting process.

The VIX moved higher in the first half of the week and then dropped again, like the VXN, but the asymmetry between the conditional variance and the implied volatility index (whose positive correlation is well known) signals that something went “wrong”.

In fact, an augment in the VIX should cause its variance to spike up but this was not the case and that is precisely why we think that the down move could be over.

The HyperVolatility team is bearish the VIX Index because the mean reverting process is quite likely to continue over the next trading hours. Consequently, the S&P500 implied volatility index is probably going to retest the 16.5% – 17% area by Friday, news permitting.

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