I have a question about rates volatility indices and how indexation around this space seems to be fractured and relatively illiquid in comparison to the explosive success of the VIX index in equities.

Is there a simple reason about why there should be a lack of demand or interest for such a product?

Also on a more technical level, I am curious why the MOVE index (which I believe is a simple survey of ATM quotes) has gained more traction than a more intellectually satisfying methodology similar in concept to the VIX (i.e. the replication of a varswap that samples OTM option quotes) such as the now discontinued TYVIX from CBOE.

Is there something about that market that makes market makers less comfortable about transparency in OTM products?


I really like that question and hope someone else also provides additional answers or insights.

MOVE measures the implied yield volatility. TYVIX measured price vol (less commonly used - so I guess flawed construction). The Price of Fixed Income Market Volatility may be interesting to read. The author(s) are directly involved in the creation of some of these indices.

I think there isn't a single answer:

  • Equity is listed and options mainly price quoted. IR (any OTC market) is vol quoted, so you already have a clearer picture without sophisticated surface construction problems. Even MOVE index uses OTC although it was acquired by ICE. The weights are: 20% 2-Yr, 20% 5-Yr, 40% 10-Yr and 20% 30-Yr. Supposedly 10-Yr is overweight as it is the benchmark maturity for OTC options (based on volume estimates at the time of creation).
  • Harley S. Bassman, the creator of the MOVE index, if I remember correctly, states that he thinks trading these is too challenging (cannot find this right now). The aforementioned authors also have a white paper Interest Rate Variance Swaps and the Pricing of Fixed Income volatility, where they explain that government bonds create unique issues with maturity and numéraires mismatches.
  • Equity VS are predominantly Index swaps but these also trade at a basis to replication due to practical difficulties in replicating the actual log payout across strikes. SPX options are super liquid and available for deep OTM puts/calls. This is not the case for T-note options.

Last but not least, CME is building CVOL (Scroll down to see a short video). Side remark, their website offers a nice intuitive explanation of your statement "(i.e. the replication of a varswap that samples OTM option quotes)".


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