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Credit-Implied Equity Volatility – Long-Term Forecasts and Alternative Fear Gauges

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Author

Summary, in English

This study discusses how to compute and forecast long-term stock return volatilities, typically with a five-year horizon or longer, using credit derivatives, and how such volatilities can be used in different areas ranging from the valuation of employee stock options and other long-term derivatives to the construction of market-based fear gauges in selected countries or market segments. In the empirical part of the paper I focus on the European financial sector and find the credit-implied volatilities and fear gauges to behave well. The forecasting accuracy of the credit-implied volatilities is found to be better than that of horizon-matched historical volatilities. (c) 2014 The Authors. Journal of Futures Markets Published by Wiley Periodicals, Inc. Jrl Fut Mark 35:753-775, 2015

Publishing year

2015

Language

English

Pages

753-775

Publication/Series

Journal of Futures Markets

Volume

35

Issue

8

Document type

Journal article

Publisher

John Wiley & Sons Inc.

Topic

  • Economics

Keywords

  • credit default swaps
  • implied volatility
  • CreditGrades
  • VIX
  • fear gauge
  • long-term forecast

Status

Published

ISBN/ISSN/Other

  • ISSN: 1096-9934