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Credit-Implied Equity Volatility – Long-Term Forecasts and Alternative Fear Gauges

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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.

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  • Byström, Hans, 2014. "Credit-Implied Equity Volatility – Long-Term Forecasts and Alternative Fear Gauges," Working Papers 2014:34, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2014_034
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    7. Byström, Hans, 2013. "Stock Prices and Stock Return Volatilities Implied by the Credit Market," Working Papers 2013:25, Lund University, Department of Economics, revised 14 Feb 2014.
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    More about this item

    Keywords

    credit default swaps; implied volatility; CreditGrades; VIX; fear gauge; long-term forecast;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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