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

Pierre Collin-Dufresne, Benjamin Junge, Anders Bjerre Trolle

Publikation: KonferencebidragPaperForskningpeer review

Abstrakt

In recent years, a liquid market for credit index (CDX) options has developed. We study the extent to which these options are priced consistently with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a rich structural credit risk model. The model 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 volatility yields significantly higher average excess returns and Sharpe ratios than selling SPX volatility
OriginalsprogEngelsk
Publikationsdato2022
Antal sider116
StatusUdgivet - 2022
BegivenhedThe 82nd Annual Meeting of American Finance Association. AFA 2022: Part of the ASSA 2022 Virtual Annual Meeting - , WWW
Varighed: 7 jan. 20229 jan. 2022
Konferencens nummer: 82
https://www.aeaweb.org/conference/

Konference

KonferenceThe 82nd Annual Meeting of American Finance Association. AFA 2022
Nummer82
Land/OmrådeWWW
Periode07/01/202209/01/2022
Internetadresse

Emneord

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

Citationsformater