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Credit-implied forward volatility and volatility expectations

In English

Författare

Summary, in English

We show how one can back out implied forward volatility term structures from credit default swap spreads. Such forward stock volatility term structures are useful for instance in forward start option pricing. We find the term structure to be downward-sloping, and the credit market's volatility forecasts tend to vary more across time than across maturities. Long-term volatility expectations, in turn, are found to be low and stable while short-term expectations are higher and more volatile. The volatility expectation's mean-reversion rate, finally, indicates that the credit market expects volatility shocks in the equity market to last for several years.

Publiceringsår

2016-04-01

Språk

Engelska

Sidor

132-138

Publikation/Tidskrift/Serie

Finance Research Letters

Volym

16

Dokumenttyp

Artikel i tidskrift

Förlag

Elsevier

Ämne

  • Economics and Business

Nyckelord

  • CDS
  • Implied volatility term structure
  • Forward volatility
  • Forward start options
  • G1
  • G10
  • G17
  • G53

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1544-6123