The Comparison of Vega Weighted Average and ATM Implied Volatility in CreditGrades Model
Date Issued
2015
Date
2015
Author(s)
Lai, Wei-Chih
Abstract
This research uses CreditGrades Model which was published by Finger (2002) and Stamicar, & Finger (2006). Both the In-the-Money options and the Out-the-Money options provide some market information that are not included in the At-the Money options. Thus, this research replaced the ATM implied volatility by Vega average weighted implied volatility. This research uses CreditGradesTM Risk Evaluation Model and chooses data of 9 public companies with great liquidity in their stocks and options in U.S. from 2009 to 2013. I input two implied volatilities with different definitions to CreditGradesTM Risk Evaluation Model to test their capability of generating accurate result when being applied to CreditGradesTM Risk Evaluation Model. Moreover, we will discuss the accuracy of the forecasting ability of the CreditGradesTM model by comparing the estimated values to the actual CDS spreads generated by data after financial crisis in 2008. Through the empirical research, I compare these two different implied volatility methods and case studies for each sample company. I find that not only the trends of the estimated value and actual value are consistent, the research outcome of adopting the vega weighted average implied volatility is better than the ATM implied volatility.
Subjects
Credit Risk Model
Implied Volatility
CDS
Type
thesis
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