Credit-implied forward volatility and volatility expectations
(2016) In Finance Research Letters 16. p.132-138- Abstract
- 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.
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/8230712
- author
- Byström, Hans LU
- organization
- publishing date
- 2016-04-01
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- CDS, Implied volatility term structure, Forward volatility, Forward start options, G1, G10, G17, G53
- in
- Finance Research Letters
- volume
- 16
- pages
- 132 - 138
- publisher
- Elsevier
- external identifiers
-
- scopus:84960883496
- wos:000373649800015
- ISSN
- 1544-6123
- DOI
- 10.1016/j.frl.2015.10.027
- language
- English
- LU publication?
- yes
- id
- defd2d8b-d2d6-4e9e-9b69-83059e782739 (old id 8230712)
- date added to LUP
- 2016-04-01 10:14:27
- date last changed
- 2022-01-25 21:11:10
@article{defd2d8b-d2d6-4e9e-9b69-83059e782739, abstract = {{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.}}, author = {{Byström, Hans}}, issn = {{1544-6123}}, keywords = {{CDS; Implied volatility term structure; Forward volatility; Forward start options; G1; G10; G17; G53}}, language = {{eng}}, month = {{04}}, pages = {{132--138}}, publisher = {{Elsevier}}, series = {{Finance Research Letters}}, title = {{Credit-implied forward volatility and volatility expectations}}, url = {{http://dx.doi.org/10.1016/j.frl.2015.10.027}}, doi = {{10.1016/j.frl.2015.10.027}}, volume = {{16}}, year = {{2016}}, }