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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.

 

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Mon, 07/11/2011 - 20:38 | 1446071 Cognitive Dissonance
Cognitive Dissonance's picture

Come on Tyler, be honest. You're conducting a Rorschach test on the Zero Hedge readership.

OK, I'll bite. It looks like a Gold Fish about to be eaten by Turbo Tax Timmy.

Did I pass? Am I sane? Do I want to know?

Let me try again. It's the USS America nuclear submarine passing crush depth.

http://en.wikipedia.org/wiki/Rorschach_test

Mon, 07/11/2011 - 20:45 | 1446095 RunningMan
RunningMan's picture

I saw a shark.

Mon, 07/11/2011 - 21:51 | 1446271 malusDiaz
malusDiaz's picture

The entire thing looks like a grouping of all correlations, aka, yes, there is a probablity your dot will be out here some where...

 

other wise known as :

 

"Is there a probability that a shark will eat me?" 

 

"OF COURSE THERE IS IF YOU SWIM IN DEEP WATER!!"

 

Useless answer to an almost equally useless question.

Mon, 07/11/2011 - 22:33 | 1446407 idea_hamster
idea_hamster's picture

They look like rainbow-colored skittles, so I'm going to say "Magic Bernanke's Unicorn Fart."

Mon, 07/11/2011 - 23:39 | 1446628 Harlequin001
Harlequin001's picture

Stingray... stingray.. da da da da da da..

Mon, 07/11/2011 - 20:46 | 1446096 Silver Kiwi
Silver Kiwi's picture

Nah, it's George Jetson's space car taking a nose dive...

Mon, 07/11/2011 - 23:45 | 1446639 Harlequin001
Harlequin001's picture

There's a Misteron in there somewhere...

This has got to be a piss take, it looks like it came straight out of a 5 yr olds 'join the dots' book...

Mon, 07/11/2011 - 20:49 | 1446105 Biosci
Biosci's picture

It's a side view of Slim Pickens riding The Bomb.  Kubrick must have preferred the other angle.

Mon, 07/11/2011 - 20:58 | 1446119 Biosci
Biosci's picture

I like the relationships; each character has its own story.  I mean, the puppy is a little too much but sometimes you have to overlook thinks like that  But the way he's holding her!  ...It's almost filthy.  He's about to kiss her, she's pulling away a little...the way his leg is smashed up against her.  And look how nicely he painted her blouse, kind of loose, transparent; you can see her breast under it touching him about here....  It's pretty torrid.  And look at the people peeking away from the doorway all shocked.  They wish.  When I see a painting like this, I must admit, I get a little...well let's just say...uh...emotionally...erect.

Tue, 07/12/2011 - 01:42 | 1446847 freelearner
freelearner's picture

Excellent LA Story reference....

Mon, 07/11/2011 - 21:16 | 1446163 max2205
max2205's picture

Stains going down the drain......

Tue, 07/12/2011 - 03:38 | 1446938 Habspurg
Habspurg's picture

I see the Crash Nebula

Tue, 07/12/2011 - 04:21 | 1446969 virgule
virgule's picture

I love the [...since credit spread is fundamentally a stationary process, while the equity index is obviously non-stationary..]

Anyone care to point me to objective evidence of these two points? It's widespread belief & faith, but I've never seen objective proof of that.

Mon, 07/11/2011 - 20:37 | 1446073 Dirtt
Dirtt's picture

What a great look at the VIX.  How do you 'one-up' yourselves so consistently?

Mon, 07/11/2011 - 20:43 | 1446089 equity_momo
equity_momo's picture

Gamma geeks still dont understand that you need "a view" because those months and years of collecting smart bucks turn into smoke once the standard deviation monster pops out the box.  

"everyones got plans until they get hit"

 

Tue, 07/12/2011 - 02:46 | 1446895 ZeroPower
ZeroPower's picture

...or you can just scalp gamma (wisely..) which has been working great all year long.

Tue, 07/12/2011 - 02:59 | 1446908 Jack Sheet
Jack Sheet's picture

geeks eke ......(eek?)

Mon, 07/11/2011 - 20:44 | 1446092 RunningMan
RunningMan's picture

Middle left area looks lonely. I suspect 2011 will help fill it in.

Mon, 07/11/2011 - 20:54 | 1446111 way-out-west
way-out-west's picture

They call him Flipper, Flipper, faster than lightning,
no-one you see, is smarter than he,
and we know Flipper, lives in a world full of wonder,
flying there-under, under the sea!

Mon, 07/11/2011 - 21:08 | 1446149 oogs66
oogs66's picture

Flipper is a new issue bond flipping strategy. It works great but please don't confuse the two :)

Mon, 07/11/2011 - 20:58 | 1446120 slewie the pi-rat
slewie the pi-rat's picture

BigBlu meets the purple people eater

Mon, 07/11/2011 - 21:14 | 1446161 WoodMizer
WoodMizer's picture

I see a , debt fueled, super secret USAF flying saucer called DarkPool Ultra (DP-U).  It is attempting a soft landing in China.  Pilot Bernak is to blame; he failed to account for headwinds, when calculating remaining fuel.  Geitner bailed out, with the last golden parachute, leaving the Bernak to deal with damage control. 

Mon, 07/11/2011 - 21:19 | 1446169 Hard1
Hard1's picture

Also saw a shark...and it's about to bite our asses!!

Mon, 07/11/2011 - 23:22 | 1446579 janus
janus's picture

how is it Mr. Durden can teach me more about chart interpretation in one modest paragraph than acedemia can manage in ten gaudy tomes?

Janus: Who are you?

TD: I'm the enchanting wizard of rhythym.

Janus: Why did you come here?

TD: I came to teach you about the rhythyms of the universe.

Tue, 07/12/2011 - 00:51 | 1446780 snowball777
snowball777's picture

Mmmmm.....taste the rainbow.

Tue, 07/12/2011 - 01:50 | 1446852 bakken
bakken's picture

This interesting charting excersize says to me,  "Stay in Ag commodities!"

Tue, 07/12/2011 - 02:47 | 1446897 ZeroPower
ZeroPower's picture

Nice. I wonder if HY would fit in nicely against the IG.

Tue, 07/12/2011 - 03:54 | 1446950 ebworthen
ebworthen's picture

 

If I see a fish scraping the bottom of the ocean - is there a problem?

I see limp fins, a leech on it's abdomen, and milky eyes; will it be o.k.?

 

Tue, 07/12/2011 - 04:05 | 1446962 bigwavedave
bigwavedave's picture

expressionist portrait of Homer Simpson with a gigantic hard on.

Tue, 07/12/2011 - 06:33 | 1447047 Miss Expectations
Miss Expectations's picture

Here's my chance to share a video about saving a whale entangled in a fishing net.

Saving Valentina

http://www.youtube.com/watch?v=EBYPlcSD490

 

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