The Definitive S&P-IG-VIX Time Series, Cross Asset Arb Chart

Tyler Durden's picture

For all who trade across asset classes, not focusing on just equity or just fixed income, a recent paper out of Stanford titled "Capital Structure Arbitrage-Implied Index Trading" contains what is arguably the coolest time series chart looking at the relationship between credit, equity and volatility. While it will have virtually no impact on one's trading prowess, the following correlation between CDX IG, the S&P and the VIX provides countless hours of fun gazing into the distance, as well as numerous probabilistic extrapolations into the future. We can already smell the 19 year old math Ph.D. coding furiously, attempting to reverse engineer the below correlations and translate them into algo signals, which trade based on absolutely nothing but correlations to the other systemic variables, will desperately try to eek out arbitrage pennies before a collapsing ponzi steamroller.

For those confused, here is the description:

Figure 2 shows a graphical summary of the relationship among the CDX Investment Grade index, S&P 500, and the VIX. There are a few general qualitative observations from this graph. First of all, high levels of CDX IG are typically accompanied by high levels of volatility. This suggests that volatility may be a reasonable predictor for the credit spread. Another important observation is that the slope of CDX.IG as a function of SPX changes over time and over different market conditions. The time-varying relationship is expected, since credit spread is fundamentally a stationary process, while the equity index is obviously non-stationary. This time-varying relationship makes it difficult to directly use the slope as the hedge ratio in the credit-index index arbitrage.

Much more for hard core cross-asset correlation fanatics in the full paper which can be found here.