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VXN Index Volatility Forecast (03/04/2011)

Our bearish view on the VXN Index has been confirmed, although on Monday the opening was at 20.78%, because the implied volatility of the Nasdaq Index collapsed to 19.41% the last Friday.

The actual volatility is 5.3% (18.3% monthly) but the TGARCH curve is still downward sloping highlighting that the mean reverting process has not been completed yet.

However, the return of volatility towards its equilibrium point is not fast and that is why the 4% level (13.8% monthly) is probably going to be achieved in 2-3 weeks time, other things being equal.

The decreased conditional variance of the VXN should favour an ulterior recovery of the underlying market which should keep rising over the next trading days. In fact, there is a positive correlation between the stochastic volatility and the VXN Index, hence, a drop in the volatility of the VXN is going to imply a diminishing value of the implied volatility over the next trading days.

The HyperVolatility team remain bearish on this market and we believe that the 17.5% – 18% area could be touched by the next Friday. However, we will use this information to profit from the underlying which is going to rise even further and that is why we will place some longs on Nasdaq futures.

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