VIX Index Volatility Forecast (24/07/2011)

The VIX Index, like the VXN, headed south all week long even if the decrease was far from being violent. In fact, the S&P500 implied volatility index opened at 20.9% on Monday, dropped to 19.2% on Tuesday, settled at 19% on Wednesday, plummeted to 17.56% on Thursday and closed at 17.52% on Friday.

The actual volatility is 6% (20.7% monthly) and the TGARCH plot is clearly showing a downward sloping curve signalling that the mean reverting process of the conditional variance is not over yet but likely to continue over the next trading hours.

Specifically, the down move of the volatility curve will end once the long term equilibrium point is going to be touched and it is worth reminding that even for this volatility index the 4% – 4.5% (13.8% – 15.5% monthly) threshold constitutes the balance level.

The HyperVolatility team remains bearish on the VIX because the positive correlation between the implied volatility index and its stochastic volatility is evidently signalling a down move of the “underlying asset”.

Specifically, the mean reverting process of the VIX should push the index back down in the 15% area by the next Friday.

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