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VXN Index Volatility Forecast (02/08/2011)

The VXN Index opened at 20.95% on Monday, rose to 21.58% on Tuesday, jumped to 24.7% on Wednesday, achieved 25.12% on Thursday and closed at 26.08% on Friday.

The actual volatility is 8% (27.7% monthly) and the volatility plot is displaying a curve which is now trading at one of the highest levels since April 2011 although the very last part of the curve shows a shy attempt to mean revert and begin its journey towards the 4% threshold (13.8% monthly) which clearly is the long term equilibrium point.

The VXN Index rose over the panic that many investors and traders are now sharing regarding the US debt ceiling and the upcoming macroeconomics news that will be released in the next days.

The HyperVolatility team is bearish the VXN because the positive correlation between the Nasdaq’s implied volatility index and its stochastic volatility measurement is a strong enough indicator which is signalling that a softening of the conditional variance will drag the VXN back down in the 17% – 18% area by Friday.

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