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Hedging investment-grade and high-yield bonds with credit VIX

Author

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  • Bouri, Elie
  • Alsagr, Naif

Abstract

The existing literature lacks evidence of the ability of newly introduced credit VIXs to hedge investment-grade and high-yield corporate bond indices. A dynamic hedging analysis shows that credit VIX is an effective hedge for its corresponding bond index, but the hedging ability of high-yield credit VIX for high-yield bonds is more stable and effective than that of investment-grade credit VIX for investment-grade bonds. A regression analysis indicates that conditional correlations decreased during the Fed tightening cycle, resulting in more hedging effectiveness for both credit VIXs; whereas, the hedging effectiveness of high-yield bonds improved around the peak of the COVID-19 outbreak.

Suggested Citation

  • Bouri, Elie & Alsagr, Naif, 2024. "Hedging investment-grade and high-yield bonds with credit VIX," Economics Letters, Elsevier, vol. 237(C).
    • Handle: RePEc:eee:ecolet:v:237:y:2024:i:c:s0165176524001137
    DOI: 10.1016/j.econlet.2024.111630
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