Market co-movement between credit default swap curves and option volatility surfaces

Yukun Shi, Charalampos Stasinakis, Yaofei Xu, Cheng Yan*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

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.

Original languageEnglish
Article number102192
JournalInternational Review of Financial Analysis
Volume82
DOIs
Publication statusPublished - Jul 2022
Externally publishedYes

Keywords

  • Credit default swap
  • Implied volatility
  • Options
  • Unscented Kalman filter

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