Pricing credit default swaps with option-implied volatility

TY - JOUR

T1 - Pricing credit default swaps with option-implied volatility

AU - Cao, Charles

AU - Yu, Fan

AU - Zhong, Zhaodong

PY - 2011

Y1 - 2011

N2 - Using the industry benchmark CreditGrades model to analyze credit default swap (CDS) spreads across a large number of companies during the 2007-09 credit crisis, the authors demonstrate that the performance of the model can be significantly improved by calibrating it with option-implied volatility rather than with historical volatility. Moreover, the advantage of using option-implied volatility is greater among companies with more volatile CDS spreads, more actively traded options, and lower credit ratings.

AB - Using the industry benchmark CreditGrades model to analyze credit default swap (CDS) spreads across a large number of companies during the 2007-09 credit crisis, the authors demonstrate that the performance of the model can be significantly improved by calibrating it with option-implied volatility rather than with historical volatility. Moreover, the advantage of using option-implied volatility is greater among companies with more volatile CDS spreads, more actively traded options, and lower credit ratings.

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U2 - 10.2469/faj.v67.n4.2

DO - 10.2469/faj.v67.n4.2

M3 - Article

SN - 0015-198X

VL - 67

SP - 67

EP - 76

JO - Financial Analysts Journal

JF - Financial Analysts Journal

IS - 4

ER -