TY - JOUR
T1 - How Integrated Are Credit and Equity Markets?
T2 - Evidence From Index Options
AU - Collin-Dufresne, Pierre
AU - Junge, Benjamin
AU - Trolle, Anders Bjerre
N1 - Published online: 12 December 2023.
PY - 2024/4
Y1 - 2024/4
N2 - We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit-risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. 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 excess returns than selling SPX volatility.
AB - We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit-risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. 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 excess returns than selling SPX volatility.
U2 - 10.1111/jofi.13300
DO - 10.1111/jofi.13300
M3 - Journal article
SN - 0022-1082
VL - 79
SP - 949
EP - 992
JO - The Journal of Finance
JF - The Journal of Finance
IS - 2
ER -