Credit-Implied Equity Volatility – Long-Term Forecasts and Alternative Fear Gauges

Hans Byström

No 2014:34, Working Papers from Lund University, Department of Economics

Abstract: This study discusses how to compute and forecast long-term stock return volatilities, typically with a 5-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.

Keywords: credit default swaps; implied volatility; CreditGrades; VIX; fear gauge; long-term forecast (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2014-09-04
New Economics Papers: this item is included in nep-fmk and nep-for
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http://project.nek.lu.se/publications/workpap/papers/wp14_34.pdf (application/pdf)

Related works:
Journal Article: Credit‐Implied Equity Volatility—Long‐Term Forecasts and Alternative Fear Gauges (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:lunewp:2014_034

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