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Lookup NU author(s): Dr Jose LiuORCiD
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
This paper uses Credit Default Swap (CDS) slope to explore straddle return variations at cross-sectional level. The cross-sectional straddle return is significantly and positively predicted by CDS slope, even after controlling several notable volatility mispricing factors. When looking deeper at this forecasting relationship, this paper finds the cross-sectional forecasting relationship between straddle return and CDSslope exists a strong time-varying pattern, highly depending on the market condition. However, the relationship between several notable volatility mispricing factors and straddle return tends to be stable over time. Through constructing the long-short trading portfolio on straddle options, we finds the trading performance is much better when past market return is at a historical lower level, past market volatility is at a historical higher level, and VIX is at a historical higher level. This indicates CDS slope tends to be more related to the option price mispricing at cross-section when market is much risker.
Author(s): Zhang H, Shi Y, Han D, Liu P, Xu Y
Publication type: Article
Publication status: Published
Journal: Journal of Futures Markets
Year: 2025
Pages: Epub ahead of print
Online publication date: 27/03/2025
Acceptance date: 26/02/2025
Date deposited: 27/02/2025
ISSN (print): 0270-7314
ISSN (electronic): 1096-9934
Publisher: John Wiley & Sons, Inc.
URL: https://doi.org/10.1002/fut.22582
DOI: 10.1002/fut.22582
Data Access Statement: The authors have nothing to report.
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