Author : Charles Cao
Publisher :
ISBN 13 :
Total Pages : 38 pages
Book Rating : 4.:/5 (129 download)
Book Synopsis The Information Content of Option-Implied Volatility for Credit Default Swap Valuation by : Charles Cao
Download or read book The Information Content of Option-Implied Volatility for Credit Default Swap Valuation written by Charles Cao and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit default swaps (CDS) are similar to out-of-the-money put options in that both offer a low cost and effective protection against downside risk. This study investigates whether put option-implied volatility is an important determinant of CDS pricing. Using a large sample of firms with both CDS and options data, we find that individual firms' put option-implied volatility dominates historical volatility in explaining the time-series variation in CDS spreads. To understand this result, we show that implied volatility is a more efficient forecast for future realized volatility than historical volatility. More importantly, the volatility risk premium embedded in option prices covaries with the CDS spread. These findings complement existing empirical evidence based on market-level data.