Volatility feedback and dealership position: Evidence from the CDS Index, Corporate Bonds, and Government Bonds

Steven Shu-Hsiu Chen

Finance Research Letters, 2024, vol. 69, issue PB

Abstract: Our study comprehensively confirms the existence of the volatility feedback effect for corporate bonds and the Credit Default Swap (CDS) indexes. We also find that dealers’ net protection-buying position of the CDS indexes relates to high credit spreads for the CDS indexes and the representative corporate bonds, and this relationship is associated with dealers’ compensation. This study is a pioneer in investigating CDS index swaptions and finding an implied volatility smirk and that hedging activities of dealers’ net positions of the underlying CDS index relate to the swaption premiums.

Keywords: CDS index; Corporate bonds; Volatility feedback; Dealers’ positions; Swaption-implied volatility smirk (search for similar items in EconPapers)
JEL-codes: G12 G20 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324012054

DOI: 10.1016/j.frl.2024.106176

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