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 R(square) 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; Merton model; Implied volatility; Equity volatility; Bond pricing. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2007-08
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