Investigating the VIX Index Relationship with High Yield & Investment Grade Bond Spreads: Exploring Structural Breaks & Threshold Effects
Eric McAlley & Carolyne Soper
What the paper says
In this study, we investigate the relationship between implied equity volatility (VIX) and corporate bond spreads, covering both investment-grade and high-yield sectors. Our dataset spans three significant periods of recent volatility: the 2008/09 financial crisis, the COVID-19 pandemic, and the regional banking crisis of 2023. To identify structural breaks, we employ the Bai & Perron (1998, 2003) methodology and conduct ordinary least squares linear regression analyses (OLS). By examining structural breaks over time, our research offers a fresh perspective on the VIX-spread relationship. We also use threshold regressions to categorize VIX into low, intermediate, and elevated ranges, exploring how different volatility levels impact these interactions. Additionally, we introduce the Federal Funds Effective Rate (FEDL) as a moderator in this relationship. Our findings confirm multiple structural breaks in spread relationships and underscore the significant influence of both VIX levels and FEDL rates on the VIX-spread relationship. Our results reveal that implied volatility has a notably stronger association with high yield spreads during the most elevated levels of VIX when compared to investment grade. Furthermore, we demonstrate that changes in interest rates minimally affect high-yield bond spreads, regardless of the absolute level of FEDL.
Evidence weight
Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40
| F · citation impact | 0.50 × 0.4 = 0.20 |
| M · momentum | 0.50 × 0.15 = 0.07 |
| V · venue signal | 0.50 × 0.05 = 0.03 |
| R · text relevance † | 0.50 × 0.4 = 0.20 |
† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.