@article{b520d96796c74dc5b916f21ae26bfef3,
title = "The information content of option-implied volatility for credit default swap valuation",
abstract = "Credit default swaps (CDS) are similar to out-of-the-money put options in that both offer a low cost and effective protection against downside risk. This study investigates whether put option-implied volatility is an important determinant of CDS spreads. Using a large sample of firms with both CDS and options data, we find that individual firms' put option-implied volatility dominates historical volatility in explaining the time-series variation in CDS spreads. To understand this result, we show that implied volatility is a more efficient forecast for future realized volatility than historical volatility. More importantly, the volatility risk premium embedded in option prices covaries with the CDS spread. These findings complement existing empirical evidence based on market-level data.",
author = "Charles Cao and Fan Yu and Zhaodong Zhong",
note = "Funding Information: We would like to thank Gurdip Bakshi, Michael Brennan, Murray Carlson, Mikhail Chernov, Peter Christofferson, Fangjian Fu, Robert Jarrow, Jean Helwege, Philippe Jorion, Bill Kracaw, Paul Kupiec, C.F. Lee, Haitao Li, K.G. Lim, Pascal Maenhout, Daniel Nuxoll, Maureen O{\textquoteright}Hara, Lubos Pastor, Alexander Philipov, Matt Pritsker, Til Schuermann, Louis Scott, Jun Tu, Stuart Turnbull, Mitch Warachka, Jun Yu, Joe Zhang, Hao Zhou, and seminar/conference participants at BGI, HEC Montreal, INSEAD, Michigan State University, National University of Singapore, Penn State University, Rutgers University, Singapore Management University, UC-Irvine, University of Houston, the McGill/IFM 2 Risk Management Conference, the 16th Annual Derivative Securities and Risk Management Conference at the FDIC, the HKUST Finance Symposium, the American Economic Association Meetings, the 15th Mitsui Life Symposium at the University of Michigan, and the 20th Anniversary Conference on Financial Economics and Accounting at Rutgers University for helpful comments. We acknowledge the financial support of the FDIC's Center for Financial Research. Special thanks go to an anonymous referee and Charles Jones (the Editor) for their valuable suggestions that significantly improved the focus of our paper. Copyright: Copyright 2010 Elsevier B.V., All rights reserved.",
year = "2010",
month = aug,
doi = "10.1016/j.finmar.2010.01.002",
language = "English (US)",
volume = "13",
pages = "321--343",
journal = "Journal of Financial Markets",
issn = "1386-4181",
publisher = "Elsevier B.V.",
number = "3",
}