Individual stock-option prices and credit spreads
Author: Cremers, Martijn ; Driessen, Joost ; Maenhout, Pascal ; Weinbaum, DavidINSEAD Area: FinanceIn: Journal of Banking and Finance, vol. 32, no. 12, December 2008 Language: EnglishDescription: p. 2706-2715.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: This paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain useful information for credit spreads and improve on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and (to a lesser extent) the implied-volatility skew matter for credit spreads. Detailed principal component analysis shows that a large part of the time-series variation in credit spreads can be explained in this way.| Item type | Current location | Call number | Status | Date due | Barcode | Item holds |
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This paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain useful information for credit spreads and improve on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and (to a lesser extent) the implied-volatility skew matter for credit spreads. Detailed principal component analysis shows that a large part of the time-series variation in credit spreads can be explained in this way.
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