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Credit‐Implied Equity Volatility—Long‐Term Forecasts and Alternative Fear Gauges

Hans Byström

Journal of Futures Markets, 2015, vol. 35, issue 8, 753-775

Abstract: This study discusses how to compute and forecast long‐term stock return volatilities, typically with a five‐year horizon or longer, using credit derivatives, and how such volatilities can be used in different areas ranging from the valuation of employee stock options and other long‐term derivatives to the construction of market‐based fear gauges in selected countries or market segments. In the empirical part of the paper I focus on the European financial sector and find the credit‐implied volatilities and fear gauges to behave well. The forecasting accuracy of the credit‐implied volatilities is found to be better than that of horizon‐matched historical volatilities. © 2014 The Authors. Journal of Futures Markets Published by Wiley Periodicals, Inc. Jrl Fut Mark 35:753–775, 2015

Date: 2015
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