Zero Hedge points out this awesome chart in an otherwise kind of back-test-eriffic Stanford paper on credit-equity correlation trading:
The chart graphs 2003-2010 investment grade credit spreads (left axis) versus the S&P (bottom axis), with the size of the circles corresponding to the level of the VIX volatility index and the colors distinguishing the year of the observations.
ZH’s take:
For all who trade across asset classes, not focusing on just equity or just fixed income, [the paper] 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.
True! Also, it’s sort of a neat encapsulation of the last 7 years in the markets. If you stare into the eyes of the psychedelic correlation dolphin, you can make out (among other things):
1. A reminder of how unusually stationary SPX/CDX is over this period. The authors of the paper note:
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.
Which is why it’s a dolphin instead of an eel – you’d normally think of credit spreads as mean reverting and equity as upward drifting. But still – the noticeable overall shape/slope does drive home the fact that if you put $1 into stocks in 2003 you’d have, oh, just about $1 in 2010.
2. A puzzle on implied vol levels in crappy markets – 2009 saw lower SPX and similar IG credit spreads to 2008 but with 20-40 equity vol rather than 50-80. (Quibble with the dolphin: with most VIX readings in the 10-30 range it’s kind of hard to tell them apart.)
3. Simplistic but intuitive visual evidence for an equity/credit disconnect during the crisis (and its closing or even reversal more recently) – the dolphin’s lower fin is a reminder that the pre-crisis markets paid up much more for IG credit for a given equity level than they did post-Lehman.
The paper tells you how to follow the dolphin to riches, if you’re a big fan of data mining and love math much more than I do.
The Definitive SPX-IG-VIX Time Series, Cross Asset Arb Chart [ZH]
Capital Structure Arbitrage-Implied Index Trading [Stanford]
Fucking Goldman!
- T Durden
Yep, Nerdy. I’d “like” this post if I could.
Francis Ford Copula loves Correlation Dolphin.
Sorry Matt, not all of us worked at Goldman.
TSFW = Too suitable for work
I see a catfish riding a bike
Looks like the black light test for DSK’s knuckle children from his Sofitel hotel room.
-Horatio Caine-
It’s too bad the market seems to have become self aware of its dolphin-like nature by 2010
Matt Levine has ties to Zero Hedge http://en.wikipedia.org/wiki/Zerohedge
Is this a long lost Georges Seurat?
P.S. Get off Zerohedge and back to work!
Next post on ZH: GS employees are tracking, monitoring ZH under direct orders from Masonic Grand Master. Analysis concludes Libyan war actually started to relieve octopus shortage in pending GS underwriting plans.
Vineyard Vines graphs are for poofs and retahds..
So you’re saying when the VIX is high, and the S&P is low, CDS spreads are higher!?!?!
And both of these things occured in 2008 and 2009?
*slaps forehead*
We already fired you, stop posting.
Copying and commenting on ZH article is the NKI.
You forgot the reference to Ben “Chairsatan” Bernanke.
Greg Norman is a chartist now?
Reminds me of the old saying, a UBS quant without a spreadsheet is like a fish without a bicycle
You seem to get it. What’s a CDS?
-AIG FP Sales
This is really groundbreaking analysis… So if traders are worried causing the VIX to increase with CDX increasing, the market underperforms? Wow. How did I ever trade before this chart?
-University of Phoenix, MBA ’12
It’s an egret, you uncultured, stupid motherfucker. You can tell by the beak and the ~260 blotter.
If he keeps this up, I’ll drop my subscription to the FT, HBR, NYT, WSJ
You should probably cancel the HBR, NYT, and WSJ subscriptions anyway.
i have a billion dollars and have no idea what the fuck this graph is
What’s the S&P?
- UBS MD
Took the words right out of my mouth!
-Buzz Killington-
is it sad that this made me laugh the hardest in the last 48 hours?
Cant believe i actually laughed out loud. Well done!
It’s the cover of a sushi menu.
Oh OK, I’ll take the Bento Box special #3. Thanks.
- guy at the DR at 40 Wall
It is a graph of open parking spots in NYC.
Okay, tuna prices have been dropping all morning, which means that everybody is waiting for it to hit rock bottom, so they can buy low. Which means that the people who own the tuna contracts are saying, “Hey, we’re losing all our damn money, and Labor Day is around the corner, and I ain’t gonna have no money to buy my son the G.I. Joe with the kung-fu grip! And my wife ain’t gonna f… my wife ain’t gonna make love to me if I got no money!” So they’re panicking right now, they’re screaming “SELL! SELL!” to get out before the price keeps dropping. They’re panicking out there right now, I can feel it.
+1
No IBD.
I have slightly over $90K in my SEP-IRA, a 529 for my kids, and a Toyota Corolla. I can’t even find the x-axis on this graph.
For a second I thought you guys get hold of my stool analysis.
Someone needs to tell new guy to stop trying so hard.
This is Dealbreaker, not r-bloggers or Wilmott, Nerdy McNerdster.
Good news for you, UBS is hiring!
Beat it nerd!
-Ogre
It’s saying the S&P is overvalued
Thats how its done bitches!
-E. Tufte
This comment deserves more cred
Light Bright, Light Bright, turn on the magic of colored lights! Shining friends, shining bright, make a wish to say goodnight.
It’s actually a map plotting the relationship of Sino Forest’s real trees to imaginary trees. Thanks for joining us on DB John!
So, based on this new chart, if I have all my wealth tied up in a satellite internet service provider that may (or may not) destroy GPS service as we know it, I’m still safe from financial ruin, right?
I would hit that
Keep Maxim though.
Or IG spreads are too narrow.
And Hustler…definitely keeping Hustler. I like the pink colors in that one.
What about News of the World? I heard they have some pretty great insight
I to like it when Izabel Goulart spreads wide
Those of us who were actually successful at GS could tell you that ‘the fact that if you put $1 into stocks in 2003 you’d have, oh, just about $1 in 2010,’ is what’s commonly known as bullshit.
SPX 67.6% Total Return.
MDY 130%
R2K 127%
I said the CDSVixS+P dolphin would flee Japan’s waters before it happened.
For the slow ones on this blog, if the chart is too hard to read, just see the concept summarized below:
Wasn’t Goldman so successful that they only needed Fed assistance once? I seem to remember a hearing and a Goldman rep saying that….
is more applicable.
It’s called a sense of humor. Try finding one.
Didnt take dammit.
We got a bottle ah peppamint schnapps weehr gettin’ fuggin retahded
JFC you probably think Will Abbott didn’t have a sense of humor either.
Wrong one there. It’s this one http://imrn.oxfordjournals.org/content/early/2011/04/09/imrn.rnr036/embed/graphic-11.gif
I think I’m on to something! You said keep your eyes out of focus, which is misleading. You want DEEP focus! I see something that could be a spaceship. Is it round? Is it pointy?
The resemblance is uncanny.
So credit spreads comove with both VIX (stupid measure of vol btw) or the price of risk and S&P or the inverse price of risk. That’s a shocker.
They never taught me these notations in music school.
Um, seriously? I did this in HS.
good man