VIX Index Volatility Forecast (21/06/2011)

The last week we were not really expecting such an increase in the implied volatility index of the S&P500 options but after a slow beginning with readings around 18% -19% the VIX rose and touched 21.35% on Wednesday, it kept increasing on Thursday where it achieved 22.7% and settled at 21.8% on Friday.

The current volatility is 9.3% (32.2% monthly) and the TGARCH plot is showing a very high curve whose actual value is unlikely to be sustainable in the long run and therefore it is reasonable to expect a mean reverting movement in the implied volatility towards the 4% threshold (13.8% monthly).

The VIX Index, like the VXN, augmented because of the drop we saw in the equity markets but it is quite unlikely that the up move of the conditional variance is going to continue over the next trading hours.

The HyperVolatility team is bearish the VIX Index because the positive correlation between price and volatility and the fact that the latter will probably collapse are good enough indicators that readings around 18.5% – 19% should be expected by Friday.

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