Forecasting credit spread volatility

Evidence from the Japanese Eurobond Market

Brock N. Johnson, Jonathan A. Batten

Research output: Contribution to journalArticle

Abstract

Different approaches to forecasting the volatility associated with the credit spreads on Yen Eurobonds are investigated. The actual volatility, historical volatility and estimated conditional volatility on spreads derived from a regression-based model with a GARCH and ARMA specification are compared within an adaptation of Black's (J. Finance, 31, 1976, 361-367) option-pricing model. Surprisingly, the regression forecast over a medium forecasting horizon suggests that historic volatility provides the better forecast. The implications of these results for volatility forecasting and credit spread modelling are also discussed.

Original languageEnglish
Pages (from-to)335-357
Number of pages23
JournalAsia-Pacific Financial Markets
Volume10
Issue number4
DOIs
Publication statusPublished - Aug 2005

Keywords

  • Credit spreads
  • Forecasting volatility
  • Yen Eurobonds

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