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VXN Index Volatility Forecast (10/04/2011)

The bearish view we had on the VXN Index paid off, although we were expecting a more robust movement, since the market opened at 20.05% dropped to 19.32% and closed at 19.76% on Friday.

The current volatility of the VXN Index is 5.3% – 5.6% (18.3% – 19.4% monthly) and the TGARCH curve shows, once again, a downward sloping curve which is probably going to bottom around 4% – 4.5% (13.8% – 15.5% monthly).

The conditional variance of the VXN Index is visibly close to its equilibrium point and therefore an ulterior down move of the Index should be the most likely scenario for the next trading days.

Specifically, we believe that the implied volatility Index for the Nasdaq100 will touch the 18.5% – 18.7% area before the end of the next week implying a potential rise of the underlying market.

The HyperVolatility team remains bearish on the VXN Index but without a clear signal we will not enter the market.

Furthermore, we will carefully monitor the volatility over the next trading days because the mean reverting point is quite proximate and a short term rise of volatility could occur quite easily if the balance level is approached too fast. Should this be the case we would probably look for short opportunities.

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