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Is the corporate bond market forward looking?

Author

Listed:
  • Hilscher, Jens
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 R2 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. JEL Classification: G12, G13

Suggested Citation

  • Hilscher, Jens, 2007. "Is the corporate bond market forward looking?," Working Paper Series 800, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007800
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp800.pdf
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    References listed on IDEAS

    as
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    17. repec:bla:jfinan:v:59:y:2004:i:2:p:831-868 is not listed on IDEAS
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    Cited by:

    1. Cremers, Martijn & Driessen, Joost & Maenhout, Pascal & Weinbaum, David, 2008. "Individual stock-option prices and credit spreads," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2706-2715, December.
    2. Winsen, Joseph K., 2010. "An overview of project finance binomial loan valuation," Review of Financial Economics, Elsevier, vol. 19(2), pages 84-89, April.
    3. Joseph K. Winsen, 2010. "An overview of project finance binomial loan valuation," Review of Financial Economics, John Wiley & Sons, vol. 19(2), pages 84-89, April.

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    More about this item

    Keywords

    corporate bond spreads; Equity; implied volatility; Merton model;
    All these keywords.

    JEL classification:

    • 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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