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Volatility discovery: Can the CDS market beat the equity options market?

Santiago Forte and Lidija Lovreta

Finance Research Letters, 2019, vol. 28, issue C, 107-111

Abstract: In this study, we derive a CDS implied equity volatility index from highly liquid one-year contracts in the Eurozone, and for the inclusive period 2008–2014. We analyze the relationship between this volatility index and the VSTOXX 12 M within a fractionally cointegrated vector autoregressive (FCVAR) model. Our results confirm a stationary long-run equilibrium relationship between the two volatility indices in which the CDS implied index plays the leading role.

Keywords: CDS market; Options market; Implied volatility; Fractional cointegration; Volatility discovery (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:107-111