Pricing credit default swaps with option-implied volatility

Charles Cao, Fan Yu, Zhaodong Zhong

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)67-76
Number of pages10
JournalFinancial Analysts Journal
Volume67
Issue number4
DOIs
StatePublished - Jan 1 2011

Fingerprint

Implied volatility
Pricing
Credit default swaps
Credit default swap (CDS) spreads
Benchmark
Industry
Credit rating
Historical volatility
Credit crisis

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Cao, Charles ; Yu, Fan ; Zhong, Zhaodong. / Pricing credit default swaps with option-implied volatility. In: Financial Analysts Journal. 2011 ; Vol. 67, No. 4. pp. 67-76.
@article{5717a828935a447d8179aeee26a772eb,
title = "Pricing credit default swaps with option-implied volatility",
abstract = "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.",
author = "Charles Cao and Fan Yu and Zhaodong Zhong",
year = "2011",
month = "1",
day = "1",
doi = "10.2469/faj.v67.n4.2",
language = "English (US)",
volume = "67",
pages = "67--76",
journal = "Financial Analysts Journal",
issn = "0015-198X",
publisher = "CFA Institute",
number = "4",

}

Pricing credit default swaps with option-implied volatility. / Cao, Charles; Yu, Fan; Zhong, Zhaodong.

In: Financial Analysts Journal, Vol. 67, No. 4, 01.01.2011, p. 67-76.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Pricing credit default swaps with option-implied volatility

AU - Cao, Charles

AU - Yu, Fan

AU - Zhong, Zhaodong

PY - 2011/1/1

Y1 - 2011/1/1

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.

UR - http://www.scopus.com/inward/record.url?scp=80052376614&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=80052376614&partnerID=8YFLogxK

U2 - 10.2469/faj.v67.n4.2

DO - 10.2469/faj.v67.n4.2

M3 - Article

AN - SCOPUS:80052376614

VL - 67

SP - 67

EP - 76

JO - Financial Analysts Journal

JF - Financial Analysts Journal

SN - 0015-198X

IS - 4

ER -