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The VIX as Stochastic Volatility for Corporate Bonds

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  • Jihyun Park
  • Andrey Sarantsev

Abstract

Classic stochastic volatility models assume volatility is unobservable. We use the Volatility Index: S&P 500 VIX to observe it, to easier fit the model. We apply it to corporate bonds. We fit autoregression for corporate rates and for risk spreads between these rates and Treasury rates. Next, we divide residuals by VIX. Our main idea is such division makes residuals closer to the ideal case of a Gaussian white noise. This is remarkable, since these residuals and VIX come from separate market segments. Similarly, we model corporate bond returns as a linear function of rates and rate changes. Our article has two main parts: Moody's AAA and BAA spreads; Bank of America investment-grade and high-yield rates, spreads, and returns. We analyze long-term stability of these models.

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  • Jihyun Park & Andrey Sarantsev, 2024. "The VIX as Stochastic Volatility for Corporate Bonds," Papers 2410.22498, arXiv.org, revised Jan 2025.
    • Handle: RePEc:arx:papers:2410.22498
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    References listed on IDEAS

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    6. Shephard, Neil (ed.), 2005. "Stochastic Volatility: Selected Readings," OUP Catalogue, Oxford University Press, number 9780199257201.
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