Implied Volatility Changes and Corporate Bond Returns

70 Pages Posted: 18 Jun 2019 Last revised: 3 Jun 2021

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Amit Goyal

University of Lausanne; Swiss Finance Institute

Xiao Xiao

University of Amsterdam - Amsterdam Business School

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: June 1, 2021

Abstract

Corporate bonds with large increases in implied volatility over the past month underperform those with large decreases in implied volatility by 0.6% per month. In contrast to An, Ang, Bali, and Cakici (2014) who show that implied volatility changes carry information about fundamental news, our evidence suggests that implied volatility changes contain information about uncertainty shocks to the firm. Our results are consistent with the notion that informed traders with new information about firm risk prefer to trade in the option market, and that the corporate bond market under-reacts to this information.

Keywords: Corporate bonds, implied volatility changes, default risk, information diffusion

JEL Classification: G10, G12, G14

Suggested Citation

Cao, Jie and Goyal, Amit and Xiao, Xiao and Zhan, Xintong, Implied Volatility Changes and Corporate Bond Returns (June 1, 2021). Management Science accepted, Swiss Finance Institute Research Paper No. 19-75, Available at SSRN: https://ssrn.com/abstract=3400694 or http://dx.doi.org/10.2139/ssrn.3400694

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://sites.google.com/site/jiejaycao

Amit Goyal (Contact Author)

University of Lausanne ( email )

Batiment Extranef 226
Lausanne, Vaud CH-1015
Switzerland
+41 21 692 3676 (Phone)
+41 21 692 3435 (Fax)

HOME PAGE: http://www.hec.unil.ch/agoyal/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Xiao Xiao

University of Amsterdam - Amsterdam Business School ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, NT
Hong Kong
(852) 3943-4179 (Phone)

HOME PAGE: http://sites.google.com/view/xintongzhan

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