Corporate Bond VIX

Abstract

We synthetically create option contracts on a corporate bond index using CDX swaptions, overcoming the limitations that originate from the lack of traded corporate bond options. Our approach allows us to estimate various risk-neutral quantities concerning the corporate bond market in a model-free manner. By constructing a forward-looking volatility measure and the variance risk premium, we examine the role of volatility risk in the corporate bond market. We highlight that the ex ante conditional second and higher moments we estimate from synthetic corporate bond options carry important implications for credit risk models, providing an extra basis for testing their validity.