Friday, February 19, 2010


So VIX is an "uncertainty barometer" of the stock market.

Is there anything else comparable in the capital markets?

The OAS (Option Adjusted Spread) on corporate debt is viewed as a gauge of credit spreads and uncertainty about the future. The OAS measures the difference between interest rates for similar-maturity high yield corporate bonds and treasury bonds.
A higher OAS implies greater anticipated default risk and therefore a higher risk premium.

Here is the relationship between high yield bond OAS and VIX:

So there is a high correlation between high yield OAS and VIX, which helps us to come up with a fair value for VIX.

The volatility of the spot VIX is significantly higher that the volatility of the high yield OAS. The VIX futures volatility is closer to the OAS volatility.

More on this later.

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