Volatility Discovery: Can the CDS Market Beat the Equity Options Market?

10 Pages Posted: 20 Nov 2017

See all articles by Santiago Forte

Santiago Forte

ESADE Business School, Ramon Llull University

Lidija Lovreta

EADA Business School

Date Written: September 1, 2017

Abstract

In this study, we derive a CDS implied equity volatility index from highly liquid one-year contracts in the Eurozone, and for the inclusive period 2008-2014. We analyze the relationship between this volatility index and the VSTOXX 12M within a fractionally cointegrated vector autoregressive (FCVAR) model. Our results confirm a stationary long-run equilibrium relationship between the two volatility indices in which the CDS implied index plays the leading role.

Keywords: CDS market; options market; implied volatility; fractional cointegration; volatility discovery

JEL Classification: G13; G14

Suggested Citation

Forte, Santiago and Lovreta, Lidija, Volatility Discovery: Can the CDS Market Beat the Equity Options Market? (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3072416 or http://dx.doi.org/10.2139/ssrn.3072416

Santiago Forte

ESADE Business School, Ramon Llull University ( email )

Av. Torreblanca 59
Sant Cugat del Vallès, Barcelona 08172
Spain

HOME PAGE: http://www.santiagoforte.com

Lidija Lovreta (Contact Author)

EADA Business School ( email )

CIF ESG08902645
C/ Aragó 204
Barcelona, CP 08011
Spain

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