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VXN Index Volatility Forecast (14/08/2011)

The HyperVolatility team forecasted a sharp increase in the VXN Index fluctuations, which is clearly evident from the chart, and according to our projections the Nasdaq’s implied volatility index was expected to touch the 38% – 40% area: our target was not only met but even surpassed. The VXN Index opened at 44.7% on Monday, dropped to 34.6% on Tuesday, touched 41.7% on Wednesday, plunged to 37.8% on Thursday and closed at 35.2% on Friday.

The current volatility is 16% (55.4% monthly) and the TGARCH is displaying a curve which is now trading sideways but that is very likely to mean revert and collapse towards the long term equilibrium point which is stable around the 4% level (13.8% monthly). The volatility reached its highest level, which was firstly tested during the “second phase” of the credit crunch in May 2010, and the fact that the conditional variance, in the 2010, started to collapse soon after having touched this point is an ulterior signal which confirms the mean reverting hypotheses we stated above.

The market should now recover for a while meaning that many people will start buying most of the shares that are now ridiculously cheap and the implied volatility in the Nasdaq’s option market should settle and retrace towards normality.

The HyperVolatility team is bearish the VXN Index because its stochastic volatility is indicating a retracement which is the initial part of the mean reverting process. The VXN Index is likely to plunge over the next hours and eventually settle around the 24% – 25% by the next Friday.

However, the way down will not always be neat and clear because some very short term bursts of the volatility could make the curve looks less even but, overall, there should not be further upward explosions.

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