The Merrill lynch Option Volatility Estimate (MOVE) Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options which are weighted on the 2, 5, 10, and 30 year contracts. I am bringing this index up because its seems to me that there is a discrepancy between Treasury option volatility and Equity option volatility. We have watched the VIX slowly grind down to pre-Lehman bankruptcy levels in a very methodical way whereas the implied volatility and realized volatility in the Treasury market has remained fairly elevated and the volatility of volatility has been quite large as well. I have a general understanding of why the treasury market has been volatile – because concerns over inflation, deflation, and a massive rolling of Government debt has the market freaked out and they do not know which direction to expect. Good news comes out and inflation fears spike, bad news comes out and treasury yields drop. The moves have been dramatic in the treasury and swap markets. What I do not understand is the equity market’s rather ambivalence towards the subject. I would think that inflation or deflation fears should put the fear of god into the equity markets as well. I am not suggesting that equities cannot rally, but at the very least the volatility of equities should take into consideration the fear of inflation or deflation.
Now let’s look at the correlation: