High yield indexes yield more than the Treasury + equity put hedge. The above chart is a toy spreadsheet model of the concept outlined in the papers below using put strike levels that gave the same daily volatility and range over the data period. The Empirical Merton Model and Option-Based Credit Spreads by Christopher L. Culp are worth a read. There is definitely a conceptual elegance to viewing credit in aggregate as Treasurys­ (risk-free rates) plus puts (at various strikes) on broad equity indexes. and it encapsulates perfectly the notion that by owning a corporate bond, you are long the risk-free rate and short tail risk.

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Comments

  1. Russ OxleyJuly 20, 2020 at 11:23 AM

    If anyone has access to a bloomberg and wants an update of this graph then I can send spreadsheet and talk through the process. Send an email above.

    ReplyDelete

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