The VIX as Stochastic Volatility for Corporate Bonds
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arXiv
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866929656835342336 |
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| author | Park, Jihyun Sarantsev, Andrey |
| author_facet | Park, Jihyun Sarantsev, Andrey |
| contents | Classic stochastic volatility models assume volatility is unobservable. We use the Volatility Index: S&P 500 VIX to observe it, to easier fit the model. We apply it to corporate bonds. We fit autoregression for corporate rates and for risk spreads between these rates and Treasury rates. Next, we divide residuals by VIX. Our main idea is such division makes residuals closer to the ideal case of a Gaussian white noise. This is remarkable, since these residuals and VIX come from separate market segments. Similarly, we model corporate bond returns as a linear function of rates and rate changes. Our article has two main parts: Moody's AAA and BAA spreads; Bank of America investment-grade and high-yield rates, spreads, and returns. We analyze long-term stability of these models. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2410_22498 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | The VIX as Stochastic Volatility for Corporate Bonds Park, Jihyun Sarantsev, Andrey Statistical Finance Applications 62J05, 62M10, 91B70, 91G30 Classic stochastic volatility models assume volatility is unobservable. We use the Volatility Index: S&P 500 VIX to observe it, to easier fit the model. We apply it to corporate bonds. We fit autoregression for corporate rates and for risk spreads between these rates and Treasury rates. Next, we divide residuals by VIX. Our main idea is such division makes residuals closer to the ideal case of a Gaussian white noise. This is remarkable, since these residuals and VIX come from separate market segments. Similarly, we model corporate bond returns as a linear function of rates and rate changes. Our article has two main parts: Moody's AAA and BAA spreads; Bank of America investment-grade and high-yield rates, spreads, and returns. We analyze long-term stability of these models. |
| title | The VIX as Stochastic Volatility for Corporate Bonds |
| topic | Statistical Finance Applications 62J05, 62M10, 91B70, 91G30 |
| url | https://arxiv.org/abs/2410.22498 |