IVLERM

• Funding body: MICINN-MCIU 
• Reference: PID2019-106465GB-I00 
• Period: June 2020 – May 2023 
• Principal Investigator: Santiago Forte 
• Research Team: Marco Menner, Carlo Sala, Lidija Lovreta 

Summary: 

The IVLERM project comprises four main objectives. The first is to analyse and compare the informational content of equity options and credit default swaps (or CDS) regarding future volatilities. For our analysis, we will distinguish between:  

1. Equity volatility versus firm asset volatility.
2. Cross-section versus time-series.  
3. Short-run versus long-run.  

The second objective is to analyse the long-memory properties of equity and firm asset volatility at the firm-level, and its impact on volatility forecasting.  

The third objective is to expand our knowledge on the design and calibration of structural credit risk models. In particular, we will adopt a model-free approach to derive simple closed-form expressions for the pricing of credit sensitive claims like risky bonds, CDS contracts, and forward CDS contracts (i.e., CDS contracts signed today, but initiated at a future date). Our result will also allow for the time decomposition of credit spreads. Additionally, we will explore in detail the theoretical and empirical properties of the CreditGrades model.  

The fourth and last objective is to investigate the information content on risk provided by the volatility surface of the option market. Specifically, we will employ different estimation techniques and test the validity of the obtained results using classical back-testing techniques as well as we aim to create new ones. As a key common denominator, all techniques we aim to implement will produce forward-looking profit/loss density estimations. This will be achieved either under the statistical (physical) measure, or under the pricing (risk-neutral) measure. One focus will thereby be on estimation and hedging of downside risk. 

This project is possible thanks to: