Market co-movement between credit default swap curves and option volatility surfaces

Shi, Y. , Stasinakis, C. , Xu, Y. and Yan, C. (2022) Market co-movement between credit default swap curves and option volatility surfaces. International Review of Financial Analysis, 82, 102192. (doi: 10.1016/j.irfa.2022.102192)

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Abstract

We analyze the co-movement between the Credit Default Index (CDX) curve and the S and P 500 index's option volatility surface. We connect the reduced-form no-arbitrage model with the Nelson-Siegel (N-S) model on hazard rate implied from the CDX curve, and identify the levels, slopes, and curvatures from these two markets via the Unscented Kalman Filter (UKF). We find that the changes in the level, slope, and curvature in the CDX curve and those in the volatility surface are correlated due to the bridge of the S and P 500 index return. Finally, the co-movement between the CDX curve and S and P 500 index's volatility surface become stronger after the late 2000s global financial crisis.

Item Type:Articles
Additional Information:This piece of research is supported by Zhejiang Provincial Natural Science Foundation of China under Grant No: LZ20G010002.
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Stasinakis, Professor Charalampos and Shi, Dr Yukun and xu, yaofei
Creator Roles:
Shi, Y.Data curation, Visualization, Writing – original draft
Stasinakis, C.Investigation, Supervision, Validation, Writing – review and editing
Xu, Y.Software
Xu, y.Conceptualization, Methodology
Authors: Shi, Y., Stasinakis, C., Xu, Y., and Yan, C.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:International Review of Financial Analysis
Publisher:Elsevier
ISSN:1057-5219
ISSN (Online):1873-8079
Published Online:26 April 2022
Copyright Holders:Copyright © 2022 Elsevier Inc.
First Published:First published in International Review of Financial Analysis 82:102192
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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