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Credit-implied forward volatility and volatility expectations

Byström, Hans LU (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.
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author
organization
publishing date
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
2015-11-25 16:48:12
date last changed
2017-01-01 03:24:17
@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},
  keyword      = { 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},
  volume       = {16},
  year         = {2016},
}