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Credit Variance Swaps and Volatility Indexes

Author

Listed:
  • Antonio Mele

    (USI Università della Svizzera italiana; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Yoshiki Obayashi

    (Applied Academics LLC)

Abstract

Credit volatility correlates quite modestly with equity volatility. Currently, only backward-looking indexes for credit volatility exist. We derive model-free indexes of expected CDS index spread volatility that rely on CDS index option prices, which reect the fair value of dedicated credit variance swaps that are forward-looking in nature. We consider both percentage and basis point expected volatility, and show that basis point volatility can be priced in a model- free format even in the presence of jumps.

Suggested Citation

  • Antonio Mele & Yoshiki Obayashi, 2013. "Credit Variance Swaps and Volatility Indexes," Swiss Finance Institute Research Paper Series 13-24, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1324
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    Citations

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    Cited by:

    1. Li, Shaoyu & Zhang, Yuanyuan & Zhu, Chunhui, 2021. "A closed-form exact solution for pricing fixed-income variance swaps with affine-jump model," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Mele, Antonio & Obayashi, Yoshiki & Shalen, Catherine, 2015. "Rate fears gauges and the dynamics of fixed income and equity volatilities," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 256-265.

    More about this item

    Keywords

    Credit Default Swap Volatility; Credit Variance Swaps; Model-Free Pricing; VIX Index; Basis Point Variance; Quadratic Contracts;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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