Hedging investment-grade and high-yield bonds with credit VIX

Elie Bouri and Naif Alsagr

Economics Letters, 2024, vol. 237, issue C

Abstract: The existing literature lacks evidence of the ability of newly introduced credit VIXs to hedge investment-grade and high-yield corporate bond indices. A dynamic hedging analysis shows that credit VIX is an effective hedge for its corresponding bond index, but the hedging ability of high-yield credit VIX for high-yield bonds is more stable and effective than that of investment-grade credit VIX for investment-grade bonds. A regression analysis indicates that conditional correlations decreased during the Fed tightening cycle, resulting in more hedging effectiveness for both credit VIXs; whereas, the hedging effectiveness of high-yield bonds improved around the peak of the COVID-19 outbreak.

Keywords: Investment-grade and high-yield bonds; Credit risk implied volatility (vix); Asymmetric conditional correlation; Hedging effectiveness; Covid-19 outbreak; Fed tightening cycle 2022–2023 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:237:y:2024:i:c:s0165176524001137

DOI: 10.1016/j.econlet.2024.111630

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