Pricing credit default swaps with option-implied volatility

Charles Cao, Fan Yu, Zhaodong Zhong

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

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

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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