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VXN Index Volatility Forecast (21/06/2011)

The Nasdaq implied volatility index rose consistently the last week, although we were expecting a quite week. The VXN opened at 20.2%, touched 22.2% on Wednesday, arrived to 24.4% on Thursday and settled at 23.5% on Friday.

The volatility is now almost 10% (34.6% monthly) and the TGARCH plot is showing a curve which is clearly high and most probably about to mean revert and collapse towards the long term equilibrium value; that is 4% (13.8% monthly).

The sharp increase in the conditional variance has been due to the quick drop occurred in the underlying market but the actual level of the volatility is probably unsustainable even in the short term and that is why we believe that the oscillation rate of the VXN Index will diminish soon.

The HyperVolatility team is bearish the VXN Index because the volatility of the Nasdaq options market is likely to touch 5.5% – 6% (19% – 20.7% monthly) whilst the actual index should retest the 19% – 20% area by Friday.

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