EconPapers    
Economics at your fingertips  
 

Estimating Option-Implied Correlation between iTraxx Europe Financial and Corporate Sub-Indexes

Cho-hoi Hui, Chi-fai Lo and Chun-sing Lau
Additional contact information
Cho-hoi Hui: Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research
Chi-fai Lo: The Chinese University of Hong Kong
Chun-sing Lau: The Chinese University of Hong Kong

No 162012, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper proposes a model to estimiate option-implied correlation embedded in options on the iTraxx Europe indexes as a measure of the spillover effect of default risk between the financial and corporate sectors in Europe. The correlation structure between the iTraxx Financials and Non-Financials sub-indexes are reflected in the option on the iTraxx Main Index, which is simultaneously considered as a basket option with the two sub-indexes as two correlated underlyings. The spillover effect was found to be more severe during the second half of year 2011, and the abrupt changes of the realized correlation between the CDS indexes of the financial and corporate sectors anticipated information of the corresponding option prices. The sovereign default risk, funding liquidity risk, level of risk aversion, and equity market performance were found to be significant determinants of the option-implied correlation, implying inter-dependence amongst various markets during the European debt crisis.

Pages: 24 pages
Date: 2012-06
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.hkimr.org/uploads/publication/16/ub_ful ... o-16_2012-final-.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Internal Server Error (http://www.hkimr.org/uploads/publication/16/ub_full_0_2_323_wp-no-16_2012-final-.pdf [301 Moved Permanently]--> http://www.aof.org.hk/research/HKIMR/uploads/publication/16/ub_full_0_2_323_wp-no-16_2012-final-.pdf [301 Moved Permanently]--> https://www.aof.org.hk/research/HKIMR/uploads/publication/16/ub_full_0_2_323_wp-no-16_2012-final-.pdf)

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:hkm:wpaper:162012

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().

 
Page updated 2021-04-07
Handle: RePEc:hkm:wpaper:162012