VIX Index Volatility Forecast (14/08/2011)

The HyperVolatility team forecasted an increase in the VIX index which would have pushed its value around the 40% level and, also in this case, the previously mentioned target was not just achieved but surpassed. In fact, the VIX Index opened at 48% on Monday, plummeted to 35% on Tuesday, touched 42.9% on Wednesday, plunged to 39% on Thursday and closed at 36.3% on Friday.

The current volatility is 18% (62% monthly) and the TGARCH plot is displaying a significant explosion of the conditional variance, which is even higher than the one we had during May 2010, but that is probably going to mean revert soon towards the 4% threshold (13.8% monthly).

The volatility is now moving a bit sideways but it is normal, for the conditional variance, to experience some short term “interruptions” during its journey towards the long term balance level and such a phenomenon is observable in every mean reverting process which follows a big spike in the volatility.

The HyperVolatility team is bearish the VIX because the stochastic volatility plot of the S&P500 implied volatility index is now displaying an-out-of-order and unsustainably high volatility curve. Therefore, the VIX should keep plummeting and possibly touch 25% – 28% by Friday.

Furthermore, the rumours of a potential downgrading of France’s triple A have been immediately vanished by the credit rating agencies themselves and the bargain hunting type of trading which is now hitting the market will push more and more traders to buy equities: all these factors together should favour a recovery of the price and a softening of the conditional variance.

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