Dynamics of Interest Rate Swap and Equity Volatilities

Abstract

While CBOE's VIX index is widely acknowledged as a broad-based investor “fear gauge” for its strong inverse relationship with major equity indexes, one cannot necessarily expect it to translate to the level of future turbulence or investor risk aversion in fixed-income markets. Indeed, expected volatilities in equity and interest rate markets as measured respectively by CBOE's VIX and their newly-launched swap rate volatility index -- SRVX -- exhibit significantly distinct behaviors. The two indexes react to different events and risk factors, thereby providing investors with complementary diversification, hedging, and risk-taking tools.