Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options

Carr, Peter; Wu, Liuren

doi:10.1016/j.jbankfin.2006.09.008

Cited by 115 publications

(65 citation statements)

References 29 publications

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“…This should translate to less noisy IVS's and more precision in the identification of factors affecting their dynamics. Similar OTC currency options data have been used in previous studies by Campa and Chang (1995), (1998), Carr and Wu (2007a), (2007b) and Christoffersen and Mazzotta (2005); the latter study actually concludes that OTC currency options data are of superior quality for volatility forecasting purposes.…”

Section: The Datasupporting

confidence: 67%

Predictable dynamics in implied volatility surfaces from OTC currency options

Chalamandaris

Tsekrekos

2010

Journal of Banking & Finance

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Section: The Datasupporting

confidence: 67%

Predictable dynamics in implied volatility surfaces from OTC currency options

Chalamandaris

Tsekrekos

2010

Journal of Banking & Finance

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“…(Carr and Wu 2007, pp. 2392-2401 present an analysis of covariance between sovereign CDS and currency option implied volatility, as well as its slope in moneyness for Mexico and Brazil.…”

mentioning

confidence: 99%

Impact Of The Ban On Uncovered sCDS Trade On The Interdependencies Between The CDS Market And Other Sectors Of Financial Markets. The Case Of Safe And Developed Versus Risky And Developing European Markets

Kliber

2016

CER

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The aim of the article is to verify the impact of the ban on uncovered sCDS trade in Europe on the interdependencies between the sCDS market and other sectors of financial markets. We analyse two European markets: the safe and developed Swedish market, and the risky and developing Hungarian one. The study covers the period from October 2008 to October 2013. We analyse changes in the interdependencies between the sCDS market and the bond market, as well as between the sCDS market and the stock exchange. We found out that in the case of the safe Swedish market, the strength of relationships of each sector of financial markets with the sCDS one was much weaker than in the case of Hungary, which may suggest that the Swedish market is less prone to crisis transmission arising from herd behaviour or speculative attacks. In the end we show that in the two economies, the influence of the sCDS market on the other sectors of financial market indeed diminished following introduction of the ban on uncovered sCDS trade.

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“…Carr and Wu [26] documented the co-movement of corporate CDS with implied volatilities and their skews. They also investigated the co-movement of sovereign CDS with currency option implied volatilities and skews [27]. The difference is that the two were not linked through a structural model, but rather through a reduced form model that assumes that the equity (currency) price jumps to zero (or a sizable amount) upon the arrival of a default.…”

Section: Capital Structure Arbitragementioning

confidence: 99%

Capital Structure Arbitrage under a Risk-Neutral Calibration

Zeitsch¹

2017

JRFM

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By reinterpreting the calibration of structural models, a reassessment of the importance of the input variables is undertaken. The analysis shows that volatility is the key parameter to any calibration exercise, by several orders of magnitude. To maximize the sensitivity to volatility, a simple formulation of Merton's model is proposed that employs deep out-of-the-money option implied volatilities. The methodology also eliminates the use of historic data to specify the default barrier, thereby leading to a full risk-neutral calibration. Subsequently, a new technique for identifying and hedging capital structure arbitrage opportunities is illustrated. The approach seeks to hedge the volatility risk, or vega, as opposed to the exposure from the underlying equity itself, or delta. The results question the efficacy of the common arbitrage strategy of only executing the delta hedge.

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Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options

Cited by 115 publications

References 29 publications

Predictable dynamics in implied volatility surfaces from OTC currency options

Predictable dynamics in implied volatility surfaces from OTC currency options

Impact Of The Ban On Uncovered sCDS Trade On The Interdependencies Between The CDS Market And Other Sectors Of Financial Markets. The Case Of Safe And Developed Versus Risky And Developing European Markets

Capital Structure Arbitrage under a Risk-Neutral Calibration

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