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Individual Stock-Option Prices and Credit Spreads

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  • Martijn Cremers
  • Joost Driessen
  • Pascal Maenhout
  • David Weinbaum

Abstract

This paper introduces measures of volatility and skewness that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain important information for credit spreads and improve on both implied volatilities of index options and on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and the implied-volatility skew matter for credit spreads. The empirical estimates are in line with the coefficients pred

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2391.

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Date of creation: 01 Jun 2004
Date of revision: 01 Jan 2005
Handle: RePEc:ysm:somwrk:amz2391

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Web page: http://icf.som.yale.edu/
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