How Integrated Are Credit and Equity Markets? Evidence from Index Options

Pierre Collin-Dufresne, Benjamin Junge, Anders B. Trolle

Publikation: KonferencebidragPaperForskningpeer review

Abstrakt

In recent years, a liquid market for options on a broad credit index (CDX) has developed. We study the extent to which these options are priced consistently with options on a broad equity index (SPX). We consider a rich structural credit risk model in which firm assets follow a jump-diffusion process with idiosyncratic and systematic risk, and we derive analytical expressions for CDX and SPX options. Calibrating the model, we find that it captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX call options against SPX put options yields statistically significant average excess returns and high Sharpe ratios.
OriginalsprogEngelsk
Publikationsdato2020
Antal sider62
StatusUdgivet - 2020
Udgivet eksterntJa
BegivenhedThe 47th European Finance Association Annual Meeting. EFA 2020 - Virtual from The Aalto University School of Business, Helsinki, Finland
Varighed: 20 aug. 202021 aug. 2020
Konferencens nummer: 47
https://efa2020.efa-meetings.org/

Konference

KonferenceThe 47th European Finance Association Annual Meeting. EFA 2020
Nummer47
LokationVirtual from The Aalto University School of Business
LandFinland
ByHelsinki
Periode20/08/202021/08/2020
Internetadresse

Emneord

  • Credit risk
  • CDX
  • CDX options
  • SPX
  • SPX options
  • Structural models

Citationsformater