Is the Corporate Bond Market Forward Looking?

38 Pages Posted: 18 Aug 2007

See all articles by Jens Hilscher

Jens Hilscher

University of California, Davis

Date Written: August 2007

Abstract

This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial information about future volatility: When predicting future volatility in a regression model, implied volatility comes in significantly and increases the R(sq) when added to historical volatility. Consistent with this finding, single stock option implied volatility helps explain the variation in bond yield spreads when included together with historical volatility.

Keywords: corporate bond spreads, Merton model, implied volatility, equity volatility, bond pricing

JEL Classification: G12, G13

Suggested Citation

Hilscher, Jens, Is the Corporate Bond Market Forward Looking? (August 2007). ECB Working Paper No. 800, Available at SSRN: https://ssrn.com/abstract=1005120

Jens Hilscher (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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