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VXN Index Volatility Forecast (04/07/2011)

The last week we were expecting a bearish move of the VXN Index and the HyperVolatility team was right once again. In fact, the Nasdaq implied volatility Index opened at 21.9 dropped to 20.7 on Tuesday, settled at 18.8 on Wednesday, decreased to 17.8 on Thursday and closed at 17.3 on Friday.

The actual volatility is 6% (20.7% monthly) and the chart is showing a volatility curve which is right in the middle of a mean reverting process which is going to bring back the volatility of the VXN Index back into its balance level which is identifiable around the 4% zone (13.8% monthly).

It is reasonable to believe that the flattening in volatility could continue over the next hours but once achieved the long term equilibrium point, which is set around the 4% – 4.5% level (13.8% -15.5% monthly) there could be some very short term volatility explosion whose intensity and magnitude should not be high.

The HyperVolatility team remains bearish the VXN Index because the positive correlation between the stochastic volatility of the Index itself and its fluctuations seems highlighting the continuation of the mean reverting process. On the other hand, the drop should not be very consistent and it is unlikely that the VXN will end up below the 13% – 14.5% threshold and that is precisely why the short term oscillation of the conditional variance should maintain the implied volatility Index around this level.

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