Download or read book A Framework for Extracting the Probability of Default from Stock Option Prices written by Azusa Takeyama and published by . This book was released on 2012 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book A Simple Method for Extracting the Probability of Default from American Put Option Prices written by Bo-Young Chang and published by . This book was released on 2020 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: "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.
Download or read book The Option iPoD written by Christian Capuano and published by . This book was released on 2008 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 zero-coupon bond and CDS-spreads. In the episode of the collapse of Bear Stearns, option-iPoD was able to early signal market sentiment.
Download or read book Equity Option Implied Probability of Default and Equity Recovery Rate written by Bo Young Chang and published by . This book was released on 2019 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is a close link between prices of equity options and the probability of default of a firm. We show that in the presence of positive expected equity recovery, the standard methods that assume zero equity recovery at default misestimate the probability of default implicit in option prices. We introduce a simple method to detect stocks with positive expected equity recovery by examining option prices, and propose a method to extract the probability of default from option prices in the presence of positive expected equity recovery. Our empirical results based on six large financial institutions in the US during the 2007-2009 crisis show that assuming zero recovery leads to significant mispricing of options and misestimation of implied probability of default.
Download or read book Equity Option implied Probability of Default and Equity Recovery written by Bo Young Chang and published by . This book was released on 2016 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: "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.
Download or read book Stock Options and Credit Default Swaps written by Liuren Wu and published by . This book was released on 2006 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Poisson process with a stochastic default arrival rate. When default occurs, the stock price drops to zero. Prior to default, the stock price follows a continuous process with stochastic volatility. The instantaneous default rate and instantaneous diffusion variance rate follow a bivariate continuous Markov process, with its dynamics specified to capture the empirical evidence on stock option prices and credit default swap spreads. Under this joint specification, we derive tractable pricing solutions for stock options and credit default swaps. We estimate the joint dynamics using stock option prices and credit default swap spreads for four of the most actively traded reference companies. The estimation highlights the interaction between market risk (diffusion variance) and credit risk (default arrival) in pricing stock options and credit default swaps. While the credit risk factor dominates credit spreads at long maturities, the stock return volatility also enters credit spreads at short maturities due to positive co-movements between the diffusion variance rate and the default arrival rate. Furthermore, while the diffusion variance rate influences the implied volatility uniformly across moneyness, the impact of the credit risk factor becomes much larger on options at lower strikes. The impact of the credit risk factor on stock options also increases with option maturity. For options maturing in six months, the contribution of the credit risk factor to option pricing is comparable in magnitude to the contribution of the diffusion variance rate.
Download or read book Implied Default Probabilities and Recovery Rates from Option Prices written by Jennifer S. Conrad and published by . This book was released on 2017 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Pricing and Liquidity of Complex and Structured Derivatives written by Mathias Schmidt and published by Springer. This book was released on 2016-10-31 with total page 125 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book introduces the “strike of default” (SOD) benchmark concept. The author determines the SOD through cross-sectional pricing between the credit market and the option market, considering the same underlying. The idea of the SOD is to combine the implied probability of default from both markets to get a time-depending share price, at which the markets believe the underlying will default. By means of credit default swaps (CDS) and option pricing methods, the SOD is determined for any exchange-listed company, where option and CDS market data are available.
Download or read book A Clinical Study of the Probability of Default for Global Financial Firms Affected by the Subprime Mortgage Crisis written by Antonio Camara and published by . This book was released on 2009 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article presents a modification of Merton's (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the U.S. over the period December 1996 through October 2008, with a special focus on the subprime mortgage crisis period. We compare the performance of the implied probability of default from our model to the expected default frequencies based on the KMV model and agency credit ratings by constructing cumulative accuracy profiles (CAP) and the receiver operating characteristic (ROC). We find that the probability of default estimates from our model are equal or superior to other credit risk measures studied based on CAP and ROC. In particular, during the subprime crisis our model surpassed credit ratings and matched or exceeded KMV in anticipating the magnitude of the crisis. An important benefit of our model over other methods is that it is a forward-looking measure that uses a range of option prices and does not rely on historical data.
Download or read book Advanced Financial Risk Management written by Donald R. Van Deventer and published by John Wiley & Sons. This book was released on 2011-09-29 with total page 502 pages. Available in PDF, EPUB and Kindle. Book excerpt: An in-depth look at financial risk management Advanced Financial Risk Management integrates interest rate risk, credit risk, foreign exchange risk, and capital allocation using a consistent risk management approach. It explains, in detailed, yet understandable terms, the analytics of these issues from A to Z. Written by experienced risk managers, this book bridges the gap between the idealized assumptions used for valuation and the realities that must be reflected in management actions. It covers everything from the basics of present value, forward rates, and interest rate compounding to the wide variety of alternative term structure models. Donald R. Van Deventer (Hawaii) founded the Kamakura Corporation in April 1990 and is currently President. In 2003, he was voted into the Risk Hall of Fame for having made a profound contribution to the field of risk management. Kenji Imai (Hawaii) heads Software Development for Kamakura and participates in selected Japan-related financial advisory assignments. Mark Mesler (Hawaii) heads the information production for Kamakura Risk Information Services.
Download or read book Extracting Risk neutral Probability Distributions from Option Prices Using Trading Volume as a Filter written by Dominique Y. Dupont and published by . This book was released on 2001 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book A New Approach for Firm Value and Default Probability Estimation Beyond Merton Models written by Dean Fantazzini and published by . This book was released on 2011 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we present a new model to assess the firm value and the default probability by using a bivariate contingent claim analysis and copula theory. First we discuss an unfeasible case, given the current derivative market on corporate bonds, which involves univariate digital options to compute the risk neutral probabilities. We then discuss a feasible model, which considers risky interest rates, instead. Moreover, we develop in this framework a new methodology to extract default probabilities from stock prices, only, going beyond the standard KMV-Merton model. Besides, the non-observability of the Merton model's state variable requires numerical methods, but the results can be unstable with noisy risky data. We show how the null price can be used as a useful barrier to separate an operative firm from a defaulted one, and to estimate its default probability. We then present an empirical application with both operative and defaulted firms to show the advantages of our approach.
Download or read book Active Credit Portfolio Management written by Jochen Felsenheimer and published by John Wiley & Sons. This book was released on 2006-03-10 with total page 581 pages. Available in PDF, EPUB and Kindle. Book excerpt: The introduction of the euro in 1999 marked the starting point of the development of a very liquid and heterogeneous EUR credit market, which exceeds EUR 350bn with respect to outstanding corporate bonds. As a result, credit risk trading and credit portfolio management gained significantly in importance. The book shows how to optimize, manage, and hedge liquid credit portfolios, i.e. applying innovative derivative instruments. Against the background of the highly complex structure of credit derivatives, the book points out how to implement portfolio optimization concepts using credit-relevant parameters, and basic Markowitz or more sophisticated modified approaches (e.g., Conditional Value at Risk, Omega optimization) to fulfill the special needs of an active credit portfolio management on a single-name and on a portfolio basis (taking default correlation within a credit risk model framework into account). This includes appropriate strategies to analyze the impact from credit-relevant newsflow (macro- and micro-fundamental news, rating actions, etc.). As credits resemble equity-linked instruments, we also highlight how to implement debt-equity strategies, which are based on a modified Merton approach. The book is obligatory for credit portfolio managers of funds and insurance companies, as well as bank-book managers, credit traders in investment banks, cross-asset players in hedge funds, and risk controllers.
Download or read book Estimating Expected Default Probabilities Using the Option Pricing Model written by CHIH-MIN. HUNG and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study estimates the expected default probability on the basis of the option pricing model. Since the estimates of the rate of return on debts and maturity were seldom researched on this approach, we measure the two parameters strictly. Furthermore, we propose an alternative method that can cover more firms to estimate the expected default probability. The results indicate that the expected default probability gave the bankrupt firm indication two years ago. We conclude that managers can grasp firms' financial status swiftly by the expected default probability.
Download or read book Systemic Risk History Measurement And Regulation written by Kreis Yvonne and published by World Scientific. This book was released on 2019-06-04 with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt: Systemic Risk: History, Measurement and Regulation presents an overview of this emerging form of risk from a global perspective. Systemic risks endanger entire financial systems, not just individual financial institutions. In this volume, the authors review how systemic risk has evolved over the last 40 years across continents to come to the forefront of regulatory attention. They then discuss transmissions channels, provide a review of systemic risk measures, and describe new regulations that have been introduced, as well as the theory and practice of financial stability committees that have been set up internationally. Overall, the book provides a practical guide to understand, identify, assess and control systemic risk.While the financial research on systemic risk has strongly increased since the events of 2008, this book is a first in providing a detailed yet concise overview of the topic, covering the history of systemic risk, its measurement, and its regulation. The authors provide both academic and practitioner-oriented insights, and draw on their different regions of expertise to provide a global perspective on systemic risk.
Download or read book An Empirical Test of Option Based Default Probabilities using Payment Behavior and Auditor Notes written by Tom Farmen and published by . This book was released on 2007 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper empirically tests the hypotheses from the Black and Scholes, Merton framework (BSM) concerning the probability of default. Payment behavior and auditor notes are used as proxy variables for financial distress. The results show that the standard deviation of equity is the most significant parameter when predicting financial distress, but also the equity ratio (equity to total assets) has a significant influence. An increase in the volatility of equity increases the probability of distress, while an increase in the equity ratio reduces this probability. The expected return on equity and time horizon of debt have little effect on financial distress in our empirical model. The results gives support for using the BSM model in credit risk applications.
Download or read book Updating the Option Implied Probability of Default Methodology written by Johannes Vilsmeier and published by . This book was released on 2014 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt:
