Implied Volatility Changes and Corporate Bond Returns
Management Science accepted
70 Pages Posted: 18 Jun 2019 Last revised: 3 Jun 2021
Date Written: June 1, 2021
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: Suggested Citation