Research and publications
Stock Return Predictability of Cross-Market Deviations in Option Prices and Credit Default Swap Spreads
Cross-market deviations in (deep out-of-the-money) equity put option prices and credit default swap spreads of the same firm are temporary and predict future movements in the put options and credit default swaps (Carr and Wu, 2011). We document that these deviations are only temporary and the prices of the two insurance contracts revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves changes in the CDS and the equity option, and, as we show for the first time, also involves largely predictable changes in the equity values of the reference firm. The predictability we document is an integral, yet unattended, component of the predictability of cross-market deviations documented in previous work.
Author(s):
Georgios Angelopoulos, Daniel Giamouridis, Georgios Nikolakakis
Summary:
Cross-market deviations in (deep out-of-the-money) equity put option prices and credit default swap spreads of the same firm are temporary and predict future movements in the put options and credit default swaps (Carr and Wu, 2011). We document that these deviations are only temporary and the prices of the two insurance contracts revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves changes in the CDS and the equity option, and, as we show for the first time, also involves largely predictable changes in the equity values of the reference firm. The predictability we document is an integral, yet unattended, component of the predictability of cross-market deviations documented in previous work.
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Register/Log in| Type : | Working paper |
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| Date : | 03/05/2012 |
| Keywords : |
Asset Pricing |
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