VXN Index Volatility Forecast (27/06/2011)

The bearish view we had the last week was confirmed by the sharp drop of volatility over 4 days although the up move occurred on Friday transformed an almost perfect bear week in a sideways one. In particular, the market opened at 22.07 dropped to 20.2 on Wednesday, moved to 20.7 on Thursday and jumped to 22.5 on Friday.

The actual volatility is 7.9% (27.3% monthly) and the TGARCH plot is clearly displaying a downward sloping curve which seems to suggest that the upcoming days will see a softening of the volatility and therefore a reduced percentage of market swings.

However, it is worth pointing out that the VXN Index was nicely collapsing, as we correctly forecasted the last week, but the great changes which affected the crude oil market twisted the “natural” fluctuations of equity indices and this caused the augment of the conditional variance.

The HyperVolatility team is still bearish the VXN Index because the volatility of the Index, which is positively correlated to the price, is clearly dropping and such a phenomenon is going to drag down the price which should touch 18.5% – 19% by Friday.

We will monitor the market quite closely because some unexpected macroeconomics news could bring some unwanted surprise but at least this week there should not be ground-breaking news.

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