Working Papers, Department of Economics, Lund University
Credit-Implied Equity Volatility – Long-Term Forecasts and Alternative Fear Gauges
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; (follow links to similar papers)
JEL-Codes: G10; (follow links to similar papers)
46 pages, September 4, 2014
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