Today at CBOE Risk Management Conference John-Mark Piampiano from Seaport Global Securities and David Rogal from Blackrock split duties in a session titled Cross-Asset Volatility Trading: Relationships Between Credit Spreads, Fixed Income Volatility, and Equity Volatility.
Rogal started things off discussing the relationship between credit spreads and equity volatility. He noted and demonstrated that credit spreads and equity volatility have exhibited a very close relationship over time. As the Fed is expected to raise interest rates next week, Rogal’s next point, discussing the impact of rate hikes on volatility. He indicated that a number of hikes or the indication by the Fed that rates will rise quicker than currently expected may be needed to result in higher market volatility. Another topic he covered was how the volatility market prices event risk. He showed that the realized volatility since 2010 for the S&P 500 has been higher around Fed meetings than all non-Fed related trading days.
Piampiano took over with his section titled The Search for Cross Asset Alpha. He stated out saying that if the relationships discussed in this session exist then we should be able to apply actual trading strategies. The basic idea is that a trader would play these associated pairs for mean reversion and have a portfolio that is basically market neutral. Many of the pairs he tested did not exhibit successful strategies based on past data. He cited the momentum of money shifting from credit to equity markets causing the spreads to widen and possibly stay wide for some time. He did finish up suggesting that these types of trades may work best as an addition to other alpha generating equity or credit trading programs.