The Term Structure of Credit Default Swap Spreads and the Cross Section of Options Returns

Hao Zhang, Yukun Shi, Dun Han, Pei Liu and Yaofei Xu

Journal of Futures Markets, 2025, vol. 45, issue 6, 637-658

Abstract: This paper, using the natural logarithmic form credit default swap (log CDS) slope, examines the variation in cross‐sectional 1‐month ATM delta‐hedged straddle returns. Our analysis reveals that the log CDS slope significantly and positively predicts these returns, even when accounting for several key volatility mispricing factors. Further investigation shows that this predictive relationship exhibits a strong time‐varying pattern, closely linked to market conditions. In contrast, the relationship between notable volatility mispricing factors and straddle returns remains relatively stable over time. Constructing a long‐short quintile portfolio on straddle options confirms that trading performance improves when the past 12‐month market return is at a historically lower level, market volatility is at a historically higher level, and the VIX is elevated. Log CDS slope, as a proxy for excess jump risk premium, significantly predicts delta‐hedged option returns during periods of high volatility.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/fut.22582

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:45:y:2025:i:6:p:637-658

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().