Credit-Implied Volatility

47 Pages Posted: 11 Mar 2015 Last revised: 5 Jun 2019

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Gerardo Manzo


Diogo Palhares


Date Written: June 1, 2019


We define and construct a credit-implied volatility (CIV) surface from the firm-by-maturity panel of CDS spreads. We use this framework to organize the behavior of corporate credit markets into three stylized facts. First, CIV exhibits a steep moneyness smirk. Second, the joint dynamics of credit spreads on all firms are captured by three interpretable factors in the CIV surface. Third, the cross section of CDS risk premia is fully explained by exposures to CIV surface shocks. We propose a structural model for joint asset behavior of all firms that is characterized by stochastic volatility and time-varying downside tail risk in aggregate asset growth.

Keywords: CDS, credit risk, implied volatility

Suggested Citation

Kelly, Bryan T. and Manzo, Gerardo and Palhares, Diogo, Credit-Implied Volatility (June 1, 2019). Available at SSRN: or

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gerardo Manzo

Independent ( email )

New York, NY 10018
United States

Diogo Palhares

Independent ( email )

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