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

Yukun Shi, Charalampos Stasinakis, Yaofei Xu and Cheng Yan

International Review of Financial Analysis, 2022, vol. 82, issue C

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.

Keywords: Credit default swap; Implied volatility; Options; Unscented Kalman filter (search for similar items in EconPapers)
JEL-codes: C11 C12 C13 G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001533

DOI: 10.1016/j.irfa.2022.102192

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