Market co-movement between credit default swap curves and option volatility surfaces |
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| Institution: | 1. Adam Smith Business School, University of Glasgow, Glasgow, UK;2. Essex Business School, University of Essex, Colchester, UK;1. Excelia Group, Excelia Business School, CERIIM, 102 Rue de Coureilles, 17024 La Rochelle, France;2. University Paris-Saclay, UMI SOURCE, UVSQ, IRD, France and Paris School of Business, PSB, 59 Rue Nationale, 75013 Paris, France;3. Rabat Business School, International University of Rabat, Rabat 11103, Morocco;4. Audencia Business School (AACSB, EQUIS, AMBA), France;1. Birmingham Business School, University of Birmingham, Edgbaston, Birmingham B15 2TY, United Kingdom;2. School of Management and Economics, Cyprus University of Technology, Lemesos 3036, Cyprus |
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| Abstract: | We analyze the co-movement between the Credit Default Index (CDX) curve and the S&P 500 index's option volatility surface. We connect the reduced-form no-arbitrage model with the Nelson-Siegel (N-S) model on hazard rate implied from the CDX curve, and identify the levels, slopes, and curvatures from these two markets via the Unscented Kalman Filter (UKF). We find that the changes in the level, slope, and curvature in the CDX curve and those in the volatility surface are correlated due to the bridge of the S&P 500 index return. Finally, the co-movement between the CDX curve and S&P 500 index's volatility surface become stronger after the late 2000s global financial crisis. |
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