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Journal of Finance Vol. 79 No. 2 2024

How Integrated are Credit and Equity Markets? Evidence from Index Options

Pierre Collin-Dufresne1,2,3,4; BENJAMIN JUNGE1,2,3,4; Anders B. Trolle1

1 Copenhagen Business School · 2 Florida International University · 3 Swiss Finance Institute · 4 HEC Paris

open access

Abstract

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit‐risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility.

DOI
10.1111/jofi.13300
Volume
79
Issue
2
Pages
949-992
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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