7/30/2019 Dynamics of Interest Rate and Equity Volatility

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Dynamics of Interest RateSwap and Equity Volatilities

CBOERMCEurope,7Sep2012

PresentedbyYoshikiObayashi,AppliedAcademicsLLC

Basedonworkincollaboraonwith:

AntonioMele,QUASaRQuantaveStrategiesandResearch

CatherineShalen,ChicagoBoardOponsExchange

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CBOE SRVX Index

LaunchedinJune2012asabenchmarkfortrackinginterestrateswapvolality

Methodologybasedonmodel-freepricingofavarianceswapbyastripofswapons

Arelatedbutdisnctriskvis--visVIX,richme-varyingdynamics

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Snapshot of Swap Volatility

Vol-of-vol increases withshorter forward horizon

SRVX vs ATM volatility Time-varying slopes

SRVX vs ATM Implied Vol

Slice Along the 10Y Tenor

60

110

160

210

2/1/07 2/1/08 2/1/09 2/1/10 2/1/11 2/1/12

3M10Y

1Y10Y

2Y10Y

SRVX vs 3m-1y Slope

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Equity vs. Rates Vol (Realized)

Realized equityvolatility vs rates

volatility

Similarities anddifferences

!

1996 1998 2000 2002 2004 2006 2008 2010 2012-80

-60

-40

-20

0

20

40

60

80

100

Time-varyingcorrelaon

1-year rolling correlation

1-month realized daily volatilities

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Equity vs. Rates Vol (Implied)

Extended periodsof divergence

Responses todifferent events

Different levels ofcorrelation withmacro factors

VIX vs. SRVX Implied Volatility

2007 2008 2009 2010 2011 2012 20130

100

200

SRVXI

ndex

2007 2008 2009 2010 2011 2012 20130

50

100

VIX

In

dex

Levels S&P500 FwdSwap Ind.Prod. DXY

SRVX -77% -13% -73% -1%

VIX -71% -26% -39% 46%

Correlations Table

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Realized vs Implied: Risk Premium

Mostly positivepremium with

infrequent but

sharp reversals

Equity Variance Risk Premium

Swap Variance Risk Premium

More persistentthan 1m equity

Changes in SRVXand premium

explain 32% of

variation in

forward rate

changes

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Volatility of Volatility

Index volatilities varygreatly over time

Marked divergences inindex volatilities, especiallyduring height of crisis

Different magnitudes ofindex volatilities

Volatility of the VIX and SRVX

2007 2008 2009 2010 2011 2012 20130

200

400

VolatilityoftheVIXIndex,annualized,

%

2007 2008 2009 2010 2011 2012 20130

50

100

Volatilit

yoftheSRVXIndex,annua

lized,

%

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SRVX and Macro Variables

Industrial Production Growth MBA Refinancing Index

-4000 -3000 -2000 -1000 0 1000 2000 3000-30

-20

-10

0

10

20

30

Weekly changes in the mortgage REFI Index

Weeklychanges

intheSRVXIndex,

1Y-1

0Y

Forecast Regression

d(IP) = c + b1 x lag(VRP_Swap)+ b2 x lag(VRP_S&P)+ b3 x lag(U.Mich) + e

Adj. R-Sq = 0.24{c,b1,b3} = significant at 1% level

Contemporaneous Regression

d(REFI) = c + b1 x d (SRVX)+ b2 x d(VRP_Swap)+ b3 x dlag(REFI) + e

Adj. R-Sq = 0.19{b1,b2} = significant at 1% level

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Future Development of SRVX

Creaonoffutures,opons,andstructuredproductsbasedonCBOESRVX

ComplementarytooltotheCBOEVIXinmacrovolalitytradingandstrategyresearch

FurtheranalysisofSRVXasaforecasngtool

ImportantDisclaimer:Theinformaoncontainedinthispresentaonisprovidedforeduca&onalpurposesonly,and

doesnotconstuteinvestment,securi&esortradingadvice.

DataSources:ChicagoBoardOponsExchangeandBloombergLP

Note:HistoricalSRVXvalueshereinareindicaveandsubjecttochange