Implied Equity and Firm Asset Volatility in Credit Default Swap Premia

61 Pages Posted: 25 Jun 2019

See all articles by Santiago Forte

Santiago Forte

ESADE Business School, Ramon Llull University

Lidija Lovreta

EADA Business School

Date Written: April 02, 2019

Abstract

We investigate the informational content of credit default swap (CDS) spreads for future volatility of firm assets and equity, and compare our results with information provided by historical volatilities. CDS implied asset (equity) volatilities explain as much as 68.40% (only 18.56%) of the cross-sectional variation in future realized asset (equity) volatilities. This informational content is clearly superior, and almost subsumes (is similar, and complements), the informational content of historical asset (equity) volatilities. We show that these results are explained by the leverage effect component in equity volatility, and the interconnection between leverage and asset volatility documented earlier in the literature.

Keywords: Credit Default Swap, Implied Firm Asset Volatility, Implied Equity Volatility, Leverage Effect

JEL Classification: G12, G13, G14, G17

Suggested Citation

Forte, Santiago and Lovreta, Lidija, Implied Equity and Firm Asset Volatility in Credit Default Swap Premia (April 02, 2019). Available at SSRN: https://ssrn.com/abstract=3406756 or http://dx.doi.org/10.2139/ssrn.3406756

Santiago Forte (Contact Author)

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

EADA Business School ( email )

CIF ESG08902645
C/ Aragó 204
Barcelona, CP 08011
Spain

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