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Implied Volatility Changes and Corporate Bond Returns

Author

Listed:
  • Jie Cao

    (Faculty of Business, School of Accounting and Finance, Hong Kong Polytechnic University, Kowloon, Hong Kong)

  • Amit Goyal

    (University of Lausanne and Swiss Finance Institute, 1015 Lausanne, Switzerland)

  • Xiao Xiao

    (Bayes Business School, City University London, London EC1Y 8TZ, United Kingdom)

  • Xintong Zhan

    (School of Management, Fudan University, Shanghai 200433, China)

Abstract

Corporate bonds with large increases in implied volatility over the past month underperform those with large decreases in implied volatility by 0.6% per month. In contrast to existing studies that show implied volatility changes carry information about fundamental news, our evidence suggests that implied volatility changes contain information about uncertainty shocks to the firm. Our results are consistent with the notion that informed traders with new information about firm risk prefer to trade in the option market and the corporate bond market underreacts to this information.

Suggested Citation

  • Jie Cao & Amit Goyal & Xiao Xiao & Xintong Zhan, 2023. "Implied Volatility Changes and Corporate Bond Returns," Management Science, INFORMS, vol. 69(3), pages 1375-1397, March.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:3:p:1375-1397
    DOI: 10.1287/mnsc.2022.4379
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    More about this item

    Keywords

    corporate bonds; implied volatility changes; default risk; information diffusion;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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