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Implied Volatility Changes and Corporate Bond Returns

Author

Listed:
  • Jie Cao

    (The Chinese University of Hong Kong (CUHK) - CUHK Business School)

  • Amit Goyal

    (University of Lausanne; Swiss Finance Institute)

  • Xiao Xiao

    (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE))

  • Xintong Zhan

    (The Chinese University of Hong Kong (CUHK) - CUHK Business School)

Abstract

Option implied volatility change has significant cross-sectional predictive power for the underlying firms’ bond returns. Corporate bonds with large increases in implied volatilities over the past month underperform those with large decreases in implied volatilities by approximately 0.6% per month. The results are robust to various bond characteristics and volatility related variables, as well as to stock and bond factor models. Our results are consistent with the notion that informed traders with new information about default risk prefer to trade in the option market, and that the corporate bond market is slow in incorporating that information.

Suggested Citation

  • Jie Cao & Amit Goyal & Xiao Xiao & Xintong Zhan, 2019. "Implied Volatility Changes and Corporate Bond Returns," Swiss Finance Institute Research Paper Series 19-75, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1975
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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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