I examine a two-period noisy rational expectations model of a futures market and show that the dispersion of expectations about a weighted average of future prices measures both the additional volatility and the additional expected.volume of trade associated with noisy information. The role played by dispersion helps clarify several stylized facts concerning volume and price behavior. Specifically, dispersion can be a factor contributing to the positive correlation between volume and absolute price changes, and the positive correlation between consecutive absolute price changes. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

While CBOE’s VIX index is widely acknowledged as a broad-based investor “fear gauge” for its strong inverse relationship with major equity indexes, one cannot necessarily expect it to translate to the level of future turbulence or investor risk-aversion in fixed-income markets. Indeed, expected volatilities in equity and interest rate markets as measured respectively by CBOE’s VIX and their newly launched swap rate volatility index, the SRVX, exhibit significantly distinct behavior. The two indexes react to different events and risk factors, thereby providing investors with complementary diversification, hedging, and risk-taking tools.