VIX Index Volatility Forecast (17/01/2011)

The volatility of the VIX index is pretty different from other markets and it should be interpreted in a different way. The chart displays the TGARCH volatility of the VIX index over the last 3 years and it provides a graphical representation of how wild market swings can get.

The current VIX volatility is 5% (79.35% in annualised terms. The figure is so high because the VIX is already calculated using volatility in annual terms but in order to provide a long-term understanding of higher and lower boundaries we need to annualise twice) and the plot seems to suggest that the bottom has been touched.

Evidently, over the last 3 years the volatility suddenly increased after touching this level and therefore we could expect the volatility of the VIX getting back to 6.5% (103% annualised) in the medium term.

Furthermore, it is not really brand new information saying that the VIX is mean reverting and the probability for the VIX to rise are pretty high, hence, given the current market condition, the staff of HyperVolatility suggests to go long VIX futures and hold the position.

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