Individual stock-option prices and credit spreads

Martijn Cremers, Joost Driessen, Pascal Maenhout, David Weinbaum

Research output: Contribution to journalArticleScientificpeer-review

90 Citations (Scopus)

Abstract

This paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain useful information for credit spreads and improve on historical volatilities when explaining the cross-sectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and (to a lesser extent) the implied-volatility skew matter for credit spreads. Detailed principal component analysis shows that a large part of the time-series variation in credit spreads can be explained in this way.
Original languageEnglish
Pages (from-to)2706-2715
JournalJournal of Banking and Finance
Volume32
Issue number12
DOIs
Publication statusPublished - Dec 2008
Externally publishedYes

Keywords

  • Credit Spreads
  • Options
  • Implied volatility
  • Skew

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