Sunday, November 23, 2008

Chart of the Week: Ratio of VIX to Yield on 3 Month T-Bills

I have been mulling over some ideas for new features on the blog (feel free to suggest some possibilities in the comments below) and one of these is a chart of the week that highlights what I think is a particularly salient development from the past week. This week, of course, there are many possibilities to draw upon, given some of the historic market activity. Friday’s Citigroup implied volatility chart is one such example.

This week, however, I would like to highlight the T-Bill aspect of the recent flight to safety with a ratio of the VIX to the 3 month T-bill yield. A chart of the VIX:IRX ratio is below.

Some readers may recall that following the Lehman Brothers bankruptcy in mid-September I highlighted this same ratio in a chart going all the way back to 1990 in Volatility Catastrophe Graphic. At that time, the VIX:IRX ratio had just exceeded 100, shattering the all-time high set in March when the ratio jumped to 5.3 on the heels of the Bear Stearns failure. This week the ratio took another quantum leap, surpassing 1600 at one point and closing at 726.

When it comes to measuring fear, VIX is only part of the story. The VIX:IRX ratio paints a much broader – and darker – picture of fear and the flight to safety.

[source: StockCharts]

3 comments:

Anonymous said...

How about a periodic review (quarterly?) of these original indicators you've developed such as VIX:VXV, VIX:IRX, etc. What's working, what's not, new insights.

Great work.

doc holiday said...

I wish I could zoom in this and study it more, but I like the direction on this. There is also a constant maturity 3-month as well, I think, but a lot of interesting ratios could be expanded on here, because we are in very weird territory!

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