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Surprise, surprise. Unlike traditional knowledge, the bond market can take its risk signal from equity. At least, it appears when ups and downs are compared to two major instability indices.
Equity investors often look at the CBOE volatile index (VIX) in the form of gauge of fear or future uncertainty in the stock market. Meanwhile, a certain-oriented investors rely on the Merryl Lynch option volatility estimate (move index) to track the expectations of future volatility in the bond market. But which market sets tone for another? Does these instability measures take each other, or are they reacting only to different sources of risk within their domains?
Challenging assumptions: proof that leads equity bonds
To answer that question, we checked how VIX and Move Indists have interacted over time, using daily data returning in 2003.
Our analysis revealed an amazing result: while the moves in the move index do not predict movements in VIX, changes in VIX help in forecasting future moves in the move index.
It releases traditional knowledge. Investors often believe that the bond market sets tone for equity, with interest rate expectations and sensitivity to comprehensive economic signals. But at least when it comes to falling the uncertainty of the future in the market, the relationship appears reversed: Bond is taking its signals from market shares.
To detect this, we noticed how the two indices behave together. In the last 20 years, they have generally moved into the forefront, especially during the period of macroeconomic tension, with a 30-day rolling correlation which occurred around 0.59. But correlation is not the reason. To test for an forecast relationship, we used the granger function -causative analysis, which helps determine whether a time chain improves the other’s forecast. In our case, the answer was clear: Vix Leeds.
Market tension and temporary bond leadership
Interestingly, the pattern changes during the period of elevated stress. When both VIX and move indices spikes above their 75th percentage levels, indicate high-endability period, we observe a reversal: the trick index shows some forecast power on the VIX. In these moments, they take hints from equity bonds. While rare, this exception suggests that in the time of rapid uncertainty, the normal flow of information between markets may be briefly reverse.
One way to explain these results is that because the speed index takes the edge during the period of excessive uncertainty, the bond managers are more for giant macro shifts in the economy and capture greater feelings than equity managers than equity managers (ie, when we go from positive to negative speed).
Implications for multi-visual and hedging strategies
These findings may have the most impact for investors who invest only one property, but more for investors spread in different asset classes. The results throw light on the fact that for multi-asset managers, when it comes to assessing fear in the market, it can be best to pay attention to the bond market when the great move into fear or uncertainty becomes clear. But when dealing with small movements in perception of future uncertainty, the stock market may be a better way of risk to track surprisingly.
These results also have strong implications for investors that are not in the equity market or debt market, yet use them to reduce the risk. If a commodity trader is looking for early signs of large moves in the equity market or bond market to get out of goods, they may want to transfer their attention between VIX and Move Indegies as governance goes on.
These conclusions challenge a long -standing perception: that the bond market always leads. At least when it comes to measuring the uncertainty of the future, the equity appears to set the tone, except, in particular, in the most unstable moments, when the bonds regain their effects. It seems that, in general, the bond market is looking at the equity market more for the future assessment of the future rather than other ways. These results are the ability to further study, not only leading the other in the market, but how this spillover of uncertainty travels between them.
