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Credit-implied forward volatility and volatility expectations

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Author

Summary, in English

We show how one can back out implied forward volatility term structures from credit default swap spreads. Such forward stock volatility term structures are useful for instance in forward start option pricing. We find the term structure to be downward-sloping, and the credit market's volatility forecasts tend to vary more across time than across maturities. Long-term volatility expectations, in turn, are found to be low and stable while short-term expectations are higher and more volatile. The volatility expectation's mean-reversion rate, finally, indicates that the credit market expects volatility shocks in the equity market to last for several years.

Publishing year

2016-04-01

Language

English

Pages

132-138

Publication/Series

Finance Research Letters

Volume

16

Document type

Journal article

Publisher

Elsevier

Topic

  • Economics and Business

Keywords

  • CDS
  • Implied volatility term structure
  • Forward volatility
  • Forward start options
  • G1
  • G10
  • G17
  • G53

Status

Published

ISBN/ISSN/Other

  • ISSN: 1544-6123