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)

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: Shi, Dr Yukun and Stasinakis, Professor Charalampos 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