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VXN Index Volatility Forecast (22/08/2011)

Needless to say that the sharp, violent and unexpected explosion of the conditional variance is the natural consequence of what happened the last week: ridiculous politicians and bad macroeconomics news. In particular, the VXN Index opened at 30.44% on Monday, rose to 31.55% on Tuesday, touched 31.17% on Wednesday, jumped to 41.61%, on Thursday and climbed to 43.47% on Friday.

The actual volatility is 15.8% (54.7% monthly) and the TGARCH plot is clearly displaying a steep upward sloping curve which highlights the fact that wild market swings and violent retracements are very probably to occur in the upcoming days. Moreover, it is worth noting that the current volatility level is very close to the one achieved during the big drop occurred in equity markets during March 2010: a very strong warning signal.

The implied volatility of the high-tech index should increase over the next hours as many market participants will keep buying protections against their stock portfolios.

The HyperVolatility team is bullish the VXN Index and we expect the Nasdaq100 implied volatility to touch the 48% – 50% by Friday.

There could be unexpected good news which is going to smooth the volatility curve but even the most insignificant bad macroeconomics data would twist investors’ mood in a matter of a few minutes.

Figures from US and Germany will be crucial this week whilst Bernanke’s speech on Friday would be of absolute importance.

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