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The Linkage Between the Options and Credit Default Swap Markets During the Subprime Mortgage Crisis
Author(s) -
Kim Tong Suk,
Park Yuen Jung,
Noh Jaesun
Publication year - 2013
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21595
Subject(s) - credit default swap , subprime mortgage crisis , linkage (software) , synthetic cdo , financial crisis , credit default swap index , itraxx , economics , subprime crisis , monetary economics , default , predictive power , financial economics , financial system , business , credit risk , finance , credit valuation adjustment , macroeconomics , biochemistry , chemistry , philosophy , epistemology , gene , credit reference
This study investigates the linkage between the options and credit default swap (CDS) markets around the subprime mortgage crisis period, using the unit recovery claim (URC). Through estimation of a well‐hedging strike price within a firm‐specific and time‐varying default corridor and consideration of the CDS term structure and firm‐specific recovery rate, modified URCs from the two markets are demonstrated to have a tighter linkage. The adjusted URCs show that, after the crisis, the effect of macroeconomic variable on deviations between the two markets increased and the options market's predictive power for the future movement of the CDS market was amplified. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark