Thursday, July 12, 2007

VOLATILITY AND CREDIT SPREADS
[Latest Global Dollar Liquidity Measure: +15.5% annual growth rate; latest Endogenous Liquidity Index: -5.5%]

The Endogenous Liquidity Index was essentially flat yesterday, but its components were not. CDS spreads again went sharply up, but volatility measures sold-off quite dramatically. There's a lesson here, at least for me. The "Great Moderation" of the business cycle —for which volatility indicators act as a proxy— matters at least as much as credit spreads. More on that soon.

2 comments:

F. said...

Credit spreads only directly involve bonds, not stocks. Stocks can certainly attract funds away from bonds and vice-versa. VIX is a much closer measure of stock activity (obviously) so no surprise that VIX correlates higher.

Agustin said...

F, thanks for the comment. You're absolutely right. I do watch credit spreads, however, as leading indicators of corporate profitabilty. Spreads began to surge in ... March 2000. Cheers, Agustin.