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.

Oct 24, 2010

Week in volatility, VIX forecast analysis

Equity indexes traded in a range this week, ending almost unchanged / slightly up over week. However VIX futures fell strongly across the board, declining an average 1.76 points, which VSTOXX futures fell 1.05 points. The sharpest decline was in Nov VIX futures (current front month, following October expiration 5 days ago) that feel almost 3 points from 24.05 to 21.10.

Despite this sharp decline I continue making bearish bets. It is true that we are in a low volatility regime, but my own research indicates that such low-volatility regimes are usually persistent, and provide a good opportunities for selling volatility. I plan to write more about this when I have more time.

October futures and options expired last Wednesday, settling at 21.41 . My forecast made last month for October expiration was 22.62 (error=1.21) vs market forecast 25.55 (error=4.14). I do not have yet forecast for Nov expiration, because of some software issues, however I plan to update the blog as soon as I have them.

Good luck traders, and hedge your deltas!

Oct 7, 2010


First off, let me apologize to all my readers for infrequent posting. I was very busy moving to NYC and just did not have the time to follow up on all the news in the volatility universe or questions that you emailed me. Also, I would like to thank my friend Ethan for all his help.

Last week vixandmore wrote two excellent posts about stress indexes, namely St. Louis Fed Financial Stress Index and Kansas City Financial Stress Index, here and here. I previously mentioned STLFSI and its relationship with VIX here.

I don't have any criticism for the indexes, however I think that practically they are useless - STLFSI is published weekly with at least one week lag (right now the latest release is dated 9/24/2010), and KCFSI is published once per month. If you're trading, such delays are simply impractical, and reconstructing indexes from raw data to create daily values seems like a lot of work.

Good luck traders, and hedge your deltas!