Credit Variance Swaps and Volatility Indexes

31 Pages Posted: 26 Apr 2013  

Antonio Mele

Swiss Finance Institute & University of Lugano; Centre for Economic Policy Research (CEPR)

Yoshiki Obayashi

Applied Academics LLC

Date Written: April 23, 2013

Abstract

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 re‡ect 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

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

Antonio Mele (Contact Author)

Swiss Finance Institute & University of Lugano ( email )

Via Buffi, 13
Lugano, 6900
Switzerland

HOME PAGE: http://www.antoniomele.org

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Yoshiki Obayashi

Applied Academics LLC ( email )

United States

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