Cross-Asset Volatility Spillover

Overview

This pillar analyzes volatility in the bond and currency markets to forecast shocks in stock market volatility. It operates on the principle that stress often appears in credit and FX markets before spilling over into equities, providing an early warning signal.

What It Does

The model systematically tracks the MOVE Index (bond market volatility) and the CVIX (currency market volatility) against the VIX (equity market volatility). It identifies significant divergences where bond or FX fear is rising without a corresponding move in stocks. These divergences often precede sharp increases in the VIX.

Why It Matters

Equity traders often focus only on the VIX, leaving them blindsided by risks brewing in other asset classes. This pillar offers a crucial edge by monitoring these 'smarter' markets, providing lead time to anticipate and position for upcoming stock market turbulence.

How It Works

The pillar ingests daily data for the VIX, MOVE, and CVIX indices. It then calculates rolling correlations and key ratios, such as the MOVE/VIX ratio, to gauge relative stress levels. An alert is triggered when bond or FX volatility surges past a statistical threshold while equity volatility remains subdued, indicating a high probability of spillover.

Methodology

The core calculation is a 20-day rolling correlation between the daily percentage change of the MOVE Index and the VIX. A spillover signal is generated when the MOVE Index's value exceeds its 50-day moving average by two standard deviations while the VIX remains below one standard deviation from its own 50-day average. The ICE BofA US High Yield Spread is used as a confirmation indicator.

Edge & Advantage

This provides a multi-asset view that catches systemic risk signals from credit markets before the average equity-focused trader is aware of them.

Key Indicators

• MOVE/VIX Ratio

  high

  Measures the relative fear between the bond market and the stock market. A rising ratio suggests bond traders are more worried.

• High Yield Spread vs VIX

  medium

  Compares credit risk (junk bonds) to equity risk. Widening spreads often lead to a higher VIX as default fears grow.

• Cross-Asset Volatility Correlation

  medium

  A 20-day rolling correlation between volatility indices. A strengthening positive correlation signals that risk is becoming systemic.

Data Sources

• CBOE

  Provides data for the VIX (S&P 500 Volatility Index).

• ICE/BofA

  Provides the MOVE Index (Treasury Bond Volatility Index) and High Yield credit spreads.

• FRED

  Federal Reserve Economic Data provides free access to many credit spread series for historical analysis.

Example Questions This Pillar Answers

• → Will the VIX index close above 25 by the end of next week?
• → Will the S&P 500 experience a drop of 3% or more in a single day next month?
• → Will equity market volatility be higher than bond market volatility for the next quarter?

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