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VXN Index Volatility Forecast (23/05/2011)

The VXN was expected to rise but the conditional variance of the implied volatility index did not move much from where it was the last week and the TGARCH plot is clearly displaying the aforementioned scenario.

The volatility is now around 4.8% – 5% (16.6% – 17.3% monthly) and the         curve is clearly downward sloping and during the upcoming days the variance could collapse and retest 4% (13.8% monthly) which is the equilibrium point but once touched this level it would not be surprising to see a further increase.

The Nasdaq Index largely moved in a very narrow range the last week and this clearly affected the oscillation rate which remained almost stable in the same area.

The HyperVolatility team is moderately bullish on the VXN Index because a mean reverting process could start any time during the next week but it is important to point out that usually volatility can stay at a lower level much longer than one might expect. Consequently, there are 2 possible scenarios:

1)    The volatility remains stable in the actual area and in this case we would have reading around the 4.1% (14.2% monthly) by Friday

2)    There is a short term explosion of the conditional variance which is going to push the VXN Index in the 22% area whilst its volatility should approach the 6.8% – 7% threshold (23.5% – 24.2% monthly)

We will monitor the situation very carefully because the sideways movement we saw the last week increased the uncertainty amongst traders and investors.

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