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VXN Index Volatility Forecast (29/05/2011)

The last week we gave you a 2 way scenario where in the 1st case we would have seen a short term explosion of market fluctuations whilst in the 2nd a fairly stable and dropping volatility situation was described. Apparently, the 2nd forecast turned out to be the most relevant one. In fact, the VXN Index opened at 19.21% dropped to 18.16% on Wednesday and settled at 19.21% on Friday.

The current volatility is 5.7% (19.7% monthly) and the TGARCH plot is showing a continuous and persistent condition in which the conditional variance is low and trading within a very narrow range.

Evidently, the shy augment in Nasdaq Index futures provoked the oscillation rate to collapse sharply over the last 5 days and settle around the lowest level of the last quartile.

Although the situation seems to be a bit unstable we reckon that volatility can remain at a low level for an extended period of time without mean reverting and the central part of the plot (October and November 2010) transparently show such an eventuality.

The HyperVolatility team is moderately bearish on the VXN Index because the fluctuations of the Nasdaq Index’s implied volatility should flatten and possibly touch 14.5% – 15.3% by the next Friday. On the other hand, we remain highly suspicious that the current situation can keep going on and a VXN surpassing the 19% threshold would be a signal that something is about to change.

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