Implied Default Probabilities and Recovery Rates from Option Prices
Title | Implied Default Probabilities and Recovery Rates from Option Prices PDF eBook |
Author | Jennifer S. Conrad |
Publisher | |
Pages | 56 |
Release | 2017 |
Genre | |
ISBN |
We propose a novel method of estimating default probabilities using equity option data. The resulting default probabilities are highly correlated with estimates of default probabilities extracted from CDS spreads, which assume constant recovery rates. Additionally, the option implied default probabilities are higher in bad economic times and for firms with poorer credit ratings and financial positions. An inferred recovery rate, after controlling for liquidity effects, is also related to underlying business and firm conditions, varies across sectors and predicts subsequent equity returns.
Equity Option-implied Probability of Default and Equity Recovery Rate
Title | Equity Option-implied Probability of Default and Equity Recovery Rate PDF eBook |
Author | Bo-Young Chang |
Publisher | |
Pages | 21 |
Release | 2016 |
Genre | |
ISBN |
"There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability. We introduce a simple method to detect stocks with positive expected equity recovery by examining option prices and propose a method to extract the default probability from option prices that allows for positive equity recovery. We demonstrate possible applications of our methodology with examples that include large financial institutions in the United States during the 2007-09 subprime crisis"--Abstract, p. ii.
Equity Option-implied Probability of Default and Equity Recovery
Title | Equity Option-implied Probability of Default and Equity Recovery PDF eBook |
Author | Bo Young Chang |
Publisher | |
Pages | 21 |
Release | 2016 |
Genre | Business failures |
ISBN |
"There is a close link between prices of equity options and the default probability of afirm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability. We introduce a simple method to detect stocks with positive expected equity recovery by examining option prices and propose a method to extract the default probability from option prices that allows for positive equity recovery. We demonstrate possible applications of our methodology with examples that include large financial institutions in the United States during the 2007–09 subprime crisis."--Abstract, page ii.
Explaining the Level of Credit Spreads
Title | Explaining the Level of Credit Spreads PDF eBook |
Author | Martijn Cremers |
Publisher | |
Pages | 58 |
Release | 2005 |
Genre | Corporate bonds |
ISBN |
Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
The Option-Ipod. the Probability of Default Implied by Option Prices Basedon Entropy
Title | The Option-Ipod. the Probability of Default Implied by Option Prices Basedon Entropy PDF eBook |
Author | Christian Capuano |
Publisher | International Monetary Fund |
Pages | 32 |
Release | 2008-08-01 |
Genre | Business & Economics |
ISBN | 1451915055 |
We present a framework to derive the probability of default implied by the price of equity options. The framework does not require any strong statistical assumption, and provide results that are informative on the expected developments of balance sheet variables, such as assets, equity and leverage, and on the Greek letters (delta, gamma and vega). We show how to extend the framework by using information from the price of a zero-coupon bond and CDS-spreads. In the episode of the collapse of Bear Stearns, option-iPoD was able to early signal market sentiment.
A Simple Method for Extracting the Probability of Default from American Put Option Prices
Title | A Simple Method for Extracting the Probability of Default from American Put Option Prices PDF eBook |
Author | Bo-Young Chang |
Publisher | |
Pages | 19 |
Release | 2020 |
Genre | Electronic books |
ISBN |
"In this paper, we present a novel method to extract the risk-neutral probability of default of a firm from American put option prices. Building on the idea of a default corridor proposed in Carr and Wu (2011), we derive a parsimonious closed-form formula for American put option prices from which the probability of default can be inferred. The proposed method is easy to implement and helps overcome the main limitation of the method used in Carr and Wu (2011), which relies on the price of one deep-out-of-the-money put option. Our empirical results are based on seven large U.S. firms for the period 2002 to 2010. These results show that, in some cases, the option-implied probability of default can provide a more accurate estimate of default probability, compared to the estimates implied from credit default swap spreads"--Abstract.
Pricing Credit Derivatives
Title | Pricing Credit Derivatives PDF eBook |
Author | Keyvan H. Alekasir |
Publisher | |
Pages | 114 |
Release | 2007 |
Genre | |
ISBN |