Oct 29, 2010

MOVE Index and VIX Index

MOVE index was developed by Merrill Lynch to measure implied volatility of US Treasury markets. It is a yield-curve weighted average of normalized implied volatility of 30-day options. The index has been in existence for several years now, however it is seldom discussed, either in itself, or in relationship to the VIX. What I am interested in is if volatility in the treasury market can forecast volatility in the equities.

The images above show the MOVE and VIX indexes for the last 5 years, and ratio=VIX/MOVE. While it appears from the plot that MOVE started increasing much earlier in apparent anticipation of 2008, corresponding to low points in the ratio plot, subsequent rise in the VIX was much more severe than that of the MOVE.

To get a better view of the relationship between the two indexes I conducted a number of regression-based tests. The results all indicate that indeed MOVE index can help predict future level VIX. The simplest model for the VIX level based on the MOVE is
VIX = EXP(-1.84+1.06*LN(MOVE))
You can type the formula directly into Excel. MOVE index closed yesterday at 98.70, implying VIX price of 20.65, compared to the last VIX price of 20.88.

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