Apr

6

Using Fed data, I calculated corp bond spreads: BAA yield - 10Y treasuries, weekly from 1990. (Data = "Market yield on U.S. Treasury securities at 10-year constant maturity, quoted on investment basis", "MOODY'S YIELD ON SEASONED CORPORATE BONDS - ALL INDUSTRIES, BAA").

The graph shows fairly close correlation with VIX, with the eyeball suggesting closer correlation since 9/11/01. Verified by correlation post and pre 911:

                correlation
pre 9/11:   0.038

post 9/11:  0.218

David Aronson comments:

John Wolberg and I have done some work to derive a normalized version on VIX in order to produce a more accurate timing signal. However we only used various measured derived from price data as normalizing variables (price velocity, acceleration and volatility). We were able to obtain some improvement. However it appears that including the default spread might improve things even more. Anyone interested in a copy of the paper email me, aronson[at]mindspring[dot]com.


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