Is the corporate bond market forward looking?

Jens Hilscher

No 800, Working Paper Series from European Central Bank

Abstract: This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial information about future volatility: When predicting future volatility in a regression model, implied volatility comes in significantly and increases the R2 when added to historical volatility. Consistent with this finding, single stock option implied volatility helps explain the variation in bond yield spreads when included together with historical volatility. JEL Classification: G12, G13

Keywords: corporate bond spreads; Equity; implied volatility; Merton model (search for similar items in EconPapers)
Date: 2007-08
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2007800

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