The Information Content of OTC Individual Put Option Implied Volatility for Credit Default Swap Spreads*

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This study investigates the information content of implied volatilities extracted from over-the-counter individual equity put options to explain credit default swap (CDS) spreads in the Korean market. Using out-of-the-money put options, we demonstrate that the implied volatility dominates historical volatility in explaining CDS spread variations and that both the predicted future volatility and the volatility risk premium inferred from the implied volatility are significant determinants of CDS spreads in an out-of-sample approach. Moreover, the effects of these variables were especially strong during the global crisis, while the volatility risk premium exhibited a negative sign during that time.
Publisher
WILEY-BLACKWELL
Issue Date
2012-08
Language
English
Article Type
Article
Keywords

EQUITY VOLATILITY; DETERMINANTS; YIELDS; RISK

Citation

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, v.41, no.4, pp.491 - 516

ISSN
2041-9945
DOI
10.1111/j.2041-6156.2012.01080.x
URI
http://hdl.handle.net/10203/102321
Appears in Collection
MT-Journal Papers(저널논문)
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