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A Joint Analysis of the Term Structure of Credit Default Swap Spreads and the Implied Volatility Surface

A Joint Analysis of the Term Structure of Credit Default Swap Spreads and the Implied Volatility... This study analyzes the co‐movements of the term structure of credit default swap (CDS) spreads and the implied volatility surface by performing a factor decomposition for both dynamics. In our joint analysis we compute the information flow between the credit and volatility factors, examine their contemporaneous interactions, and assess the effectiveness of cross‐hedges. Using options and CDS data for U.S. and European indices, the credit market is found to be the main contributor to overall market innovations. Our methodology is parsimonious and captures the intrinsic relationships between both markets. The empirical study highlights cross‐market linkages during the Global Financial Crisis. Factors with small associated eigenvalues can be of tremendous importance for effective cross‐hedging. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

A Joint Analysis of the Term Structure of Credit Default Swap Spreads and the Implied Volatility Surface

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References (34)

Publisher
Wiley
Copyright
© 2013 Wiley Periodicals, Inc.
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.21594
Publisher site
See Article on Publisher Site

Abstract

This study analyzes the co‐movements of the term structure of credit default swap (CDS) spreads and the implied volatility surface by performing a factor decomposition for both dynamics. In our joint analysis we compute the information flow between the credit and volatility factors, examine their contemporaneous interactions, and assess the effectiveness of cross‐hedges. Using options and CDS data for U.S. and European indices, the credit market is found to be the main contributor to overall market innovations. Our methodology is parsimonious and captures the intrinsic relationships between both markets. The empirical study highlights cross‐market linkages during the Global Financial Crisis. Factors with small associated eigenvalues can be of tremendous importance for effective cross‐hedging. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark

Journal

The Journal of Futures MarketsWiley

Published: Jun 1, 2013

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