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Volatility discovery: Can the CDS market beat the equity options market?

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  • Forte, Santiago
  • Lovreta, Lidija

Abstract

In this study, we derive a CDS implied equity volatility index from highly liquid one-year contracts in the Eurozone, and for the inclusive period 2008–2014. We analyze the relationship between this volatility index and the VSTOXX 12 M within a fractionally cointegrated vector autoregressive (FCVAR) model. Our results confirm a stationary long-run equilibrium relationship between the two volatility indices in which the CDS implied index plays the leading role.

Suggested Citation

  • Forte, Santiago & Lovreta, Lidija, 2019. "Volatility discovery: Can the CDS market beat the equity options market?," Finance Research Letters, Elsevier, vol. 28(C), pages 107-111.
    • Handle: RePEc:eee:finlet:v:28:y:2019:i:c:p:107-111
    DOI: 10.1016/j.frl.2018.04.015
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    Cited by:

    1. Theodoros Bratis & Nikiforos T. Laopodis & Georgios P. Kouretas, 2023. "CDS and equity markets’ volatility linkages: lessons from the EMU crisis," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1259-1281, April.
    2. Forte, Santiago & Lovreta, Lidija, 2023. "Credit default swaps, the leverage effect, and cross-sectional predictability of equity and firm asset volatility," Journal of Corporate Finance, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    CDS market; Options market; Implied volatility; Fractional cointegration; Volatility discovery;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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