Wednesday, November 26, 2008

Forget about VIX. Watch out spreads.

Current crisis proves that Volatility Index VIX as a investing indicator is not as sufficient as expected. History showed level of 40 as an indication of market bottom. But it has not been case of current market. VIX crossed easily above 40 and jumped to 89. Similar situation happened during October 87 when VIX peaked at 150.

More accurate indicator for coming turmoils have been spreads. Either TED spread or discount rate spread for commercial papers. It concerns short term (up to 9 months) paper. As you can from the chart, for lower rated A2/P2 the spread reached high already in the beginning of 2008. Market had been more cautious than after 9/11/2001. This has been the first signal for lack of liquidity.


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