TY - JOUR
T1 - Market co-movement between credit default swap curves and option volatility surfaces
AU - Shi, Yukun
AU - Stasinakis, Charalampos
AU - Xu, Yaofei
AU - Yan, Cheng
N1 - Publisher Copyright:
© 2022 Elsevier Inc.
PY - 2022/7
Y1 - 2022/7
N2 - We analyze the co-movement between the Credit Default Index (CDX) curve and the S&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&P 500 index return. Finally, the co-movement between the CDX curve and S&P 500 index's volatility surface become stronger after the late 2000s global financial crisis.
AB - We analyze the co-movement between the Credit Default Index (CDX) curve and the S&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&P 500 index return. Finally, the co-movement between the CDX curve and S&P 500 index's volatility surface become stronger after the late 2000s global financial crisis.
KW - Credit default swap
KW - Implied volatility
KW - Options
KW - Unscented Kalman filter
UR - http://www.scopus.com/inward/record.url?scp=85129477714&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2022.102192
DO - 10.1016/j.irfa.2022.102192
M3 - Article
AN - SCOPUS:85129477714
SN - 1057-5219
VL - 82
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
M1 - 102192
ER -