31 Pages Posted: 26 Apr 2013
Date Written: April 23, 2013
Credit volatility correlates quite modestly with equity volatility. Currently, only backward-looking indexes for credit volatility exist. We derive model-free indexes of expected CDS index spread volatility that rely on CDS index option prices, which reect the fair value of dedicated credit variance swaps that are forward-looking in nature. We consider both percentage and basis point expected volatility, and show that basis point volatility can be priced in a model- free format even in the presence of jumps.
Keywords: Credit Default Swap Volatility, Credit Variance Swaps, Model-Free Pricing, VIX Index, Basis Point Variance, Quadratic Contracts
JEL Classification: E4, G11, G12, G13
Suggested Citation: Suggested Citation
Mele, Antonio and Obayashi, Yoshiki, Credit Variance Swaps and Volatility Indexes (April 23, 2013). Swiss Finance Institute Research Paper No. 13-24. Available at SSRN: https://ssrn.com/abstract=2255585 or http://dx.doi.org/10.2139/ssrn.2255585
By Jianfeng Hu