Tuesday, June 2, 2009

More On The VIX - MORE Correlation

In response to a flood of queries, the correlation between the VIX and MOVE (ML's Treasury vol index), is presented below: while the R^2 over the past year is sketchy at 0.585, historical correlation climbs to a sturdier 0.7

Assuming the last metric is relevant, the odd spike in VIX yesterday, despite a sturbbornly persistent lack of negative TICKs in yesterday's market, could be explained exactly by this phenomenon, as whatever correlation desks remain tried to game the relationship. Either way, a pick up in volatility in this much more critical asset class is significantly more troublesome to the US economy as at least with Treasuries we know the Fed is directly monetizing (i.e. purchasing). Heightened volatility is thus a representation of the bond vigilante-Fed duel, and abnormally high vol is likely an indication that the Fed is losing, or just gaming the yield ever higher, to provide a relevant alternative to equity markets if/when it so chooses, at which point the MOVE-VIX relative performance will flip dramatically. And after all, who cares about regressions to the mean anymore.

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