The Information Content of Option-Implied Volatility for Credit Default Swap Valuation
We explore the connection between the market for single-name credit default swaps (CDS) and the market for individual stock options. We find that the contemporaneous link between CDS spreads and option-implied volatilities is stronger among firms with lower credit ratings, higher CDS spread volatilities, and more actively traded options. Among such firms, the changes in both CDS spreads and implied volatilities forecast future stock returns. Although the changes in implied volatility consistently forecast future CDS spread changes, the reverse does not hold. We interpret these findings as broadly consistent with informed traders preferentially using the options market, and to some extent the CDS market, to exploit their information advantage. Although implied volatility dominates historical volatility in forecasting the future realized volatility on individual stocks, the volatility risk premium embedded in option prices also plays a crucial role in explaining CDS spreads. Our results are robust under a pricing analysis using a structural credit risk model. They are also una ected by historical volatilities estimated at short or long horizons.
Charles Cao Fan Yu Zhaodong (Ken) Zhong
Smeal College of Business at the Pennsylvania State University Eli Broad College of Business at the Michigan State University
国际会议
广州
英文
1-42
2009-07-07（万方平台首次上网日期，不代表论文的发表时间）