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VXN Index Volatility Forecast (02/05/2011)

The HyperVolatility team was right once again!!! We were expecting a further drop of the implied volatility of the Nasdaq Index and effectively so it was. Specifically, the market opened at 17.2% dropped to 16.2% but closed at 16.5% on Friday.

The current volatility is 5.1% (17.6% monthly) and the TGARCH plot is displaying a downward sloping curve highlighting the fact that a further decrease of implied volatility could characterise the first days of the week.

However, the mean reverting point has been achieved and the volatility of the VXN has been very low for quite a while implying that a short term explosion is a statistically probable event that should not be opted out.

Additionally, if we look at the chart it is easy to notice that the conditional variance of the Nasdaq Index’s implied volatility has been diminishing at a constant rate since March.

The HyperVolatility team is moderately bullish on this market because we believe that a short term augment of the conditional variance could push the VNX Index up once again. Explicitly, we believe that the TGARCH curve will achieve 7.5% – 8% (25.9% – 27.7% monthly) whilst the VXN is going to rise and touch 19% – 20% by the end of the week.

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