Merrill Lynch Option Volatility Estimate (MOVE) Index measures volatility in the Bond market. As, it can track volatility in the US interest rates, therefore it is also referred to as the VIX of Bond market. In the year 2019, it was acquired by Intercontinental Exchange from Bank of America Merrill Lynch. The Index was created by Harley Bassman.
There are three types of indicators both Economists and Investors watch –
- Lagging,
- Coincident and,
- Leading.
Volatility indices are used by investors to manage risks. We have VIX to track volatility in the US stock market and Merrill Lynch Option Volatility Estimate (MOVE) Index for US interest rates.
Since Merrill Lynch Option Volatility Estimate Index tracks volatility in the US interest rates therefore we can say it is a coincident indicator. It doesn’t move in tandem with the VIX index, which measures the 30-day expected volatility of the US stock market.
A decline in volatility pushes investors to take more risks. Apart from that, it (decline in volatility) also provides much-required liquidity. Investors who invest in both bonds and equities must follow both indexes. Merrill Lynch Option Volatility Estimate Index provides strong signals about market participants’ expectations on what the monetary policy path of the US Federal Reserve could be.
From the historical data, we can deduce that when US Federal Reserve is expected to cut interest rates, MOVE Index gradually begins its journey to hit lower levels. On the other hand, the reverse happens when the US Federal Reserve is expected to raise interest rates.
Investors can use the Index to see how the Stock market will perform in months ahead. As we already covered, it signals the US Federal Reserve monetary policy path. So, a reduction in interest rates implies a relief for those who are invested in equities. While if expectations that US Federal Reserve will soon raise interest rates then, make changes to our portfolio for gloomy days well in advance.
