Is the Corporate Bond Market Forward Looking?
38 Pages Posted: 18 Aug 2007
Date Written: August 2007
Abstract
This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial information about future volatility: When predicting future volatility in a regression model, implied volatility comes in significantly and increases the R(sq) when added to historical volatility. Consistent with this finding, single stock option implied volatility helps explain the variation in bond yield spreads when included together with historical volatility.
Keywords: corporate bond spreads, Merton model, implied volatility, equity volatility, bond pricing
JEL Classification: G12, G13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Explaining the Rate Spread on Corporate Bonds
By Edwin J. Elton, Martin J. Gruber, ...
-
The Determinants of Credit Spread Changes
By Pierre Collin-dufresne, J. Spencer Martin, ...
-
How Much of Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
By Francis A. Longstaff, Sanjay Mithal, ...
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Structural Models of Corporate Bond Pricing: An Empirical Analysis
By Young Ho Eom, Jing-zhi Huang, ...
-
By Roberto Blanco, Simon Brennan, ...