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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

2015

Språk

Engelska

Publikation/Tidskrift/Serie

Working Paper / Department of Economics, School of Economics and Management, Lund University

Issue

34

Dokumenttyp

Working paper

Förlag

Department of Economics, Lund University

Ämne

  • Economics

Nyckelord

  • forward start options
  • forward volatility
  • implied volatility term structure

Status

Published