tag:blogger.com,1999:blog-7905515.post2805376036262886538..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Negative SPX/VIX Correlation and Fu ResultEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-7905515.post-22583144572057657612011-06-29T09:26:57.363-05:002011-06-29T09:26:57.363-05:00Since VIX is a function of both trailing realized ...Since VIX is a function of both trailing realized vol on the index (30-60 day ATR divided by 30-60 moving day average of closes) and recent price changes (20-30 day ROC on the index), it follows that there's only one really useful way to look at VIX.<br /><br />Calculate what the VIX "should be" based on vol and returns, the see what the VIX "is", and use the result as a sentiment indicator.<br /><br />However, I've found that the VIX is pretty much irrelevent to me in the timeframes (2 weeks to 8 months) that I trade.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-31397854627067822422011-06-29T00:11:42.560-05:002011-06-29T00:11:42.560-05:00try the same in long dated USD/JPY vols (like 10y)...try the same in long dated USD/JPY vols (like 10y) against the change in same maturity forwards. correlation is much stronger. it's more than just the "spilled milk" effect, and more than implied by "constant normalized vol" or such. the forward drives vega exposure of some big derivatives books that are all the same way, and they all have to rebalance to stay within risk limits. there is no natural counterparty to take the other side, hence the "correlation" between the two markets (more llike cause and effect really). <br /><br />that's about as deep as the philosophical part goes, yet I ocassionally see people that are unsatisfied with this explanation and try to find some much deeper meaning in all this, with the use of advanced quantitative tools. and, if you look hard enough, you will find some smart thing to say about what "the market" expects to happen to volatility in the long term future. but from what I see the market couldn't care less about the long term of anything. "the market" is an extremely busy person, and always has important things to take care of on the short term (like which way those derivatives books are coming from, in this case). the long term ends up being an unintended consequence of short term priorities. I wouldn't be surprised if a degree of this happened in most markets.<br /><br />I find the effort that is put into finding what "the market" expects to be very similar to that joke with the indians that are preparing for winter. the more people try to find out what "the market" thinks and front run it, the less efficient markets get.r2d2noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-7520867616866593522011-06-28T21:37:14.659-05:002011-06-28T21:37:14.659-05:00But who wants to take the time to fit an eGarch mo...But who wants to take the time to fit an eGarch model to all the idiosyncratic returns? I've been looking at Random Matrix Theory and it basically says to just assume the idiosyncratic factors are random noise.Johnnoreply@blogger.com