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 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 Equity Option implied Probability of Default and Equity Rate 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:
Download or read book The Option Ipod the Probability of Default Implied by Option Prices Basedon Entropy written by Christian Capuano and published by International Monetary Fund. This book was released on 2008-08-01 with total page 32 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 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.
Download or read book The Option iPoD written by Christian Capuano and published by International Monetary Fund. This book was released on 2008-08-01 with total page 31 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 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.
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 Recovery Risk in Credit Default Swap Premia written by Timo Schläfer and published by Springer Science & Business Media. This book was released on 2011-05-18 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt: Timo Schläfer exploits the fact that differently-ranking debt instruments of the same issuer face identical default risk but different default-conditional recovery rates. He shows that this allows isolating recovery risk without any of the rigid assumptions employed by priors and implements his approach using credit default swap data.
Download or read book Innovations in Quantitative Risk Management written by Kathrin Glau and published by Springer. This book was released on 2015-01-09 with total page 434 pages. Available in PDF, EPUB and Kindle. Book excerpt: Quantitative models are omnipresent –but often controversially discussed– in todays risk management practice. New regulations, innovative financial products, and advances in valuation techniques provide a continuous flow of challenging problems for financial engineers and risk managers alike. Designing a sound stochastic model requires finding a careful balance between parsimonious model assumptions, mathematical viability, and interpretability of the output. Moreover, data requirements and the end-user training are to be considered as well. The KPMG Center of Excellence in Risk Management conference Risk Management Reloaded and this proceedings volume contribute to bridging the gap between academia –providing methodological advances– and practice –having a firm understanding of the economic conditions in which a given model is used. Discussed fields of application range from asset management, credit risk, and energy to risk management issues in insurance. Methodologically, dependence modeling, multiple-curve interest rate-models, and model risk are addressed. Finally, regulatory developments and possible limits of mathematical modeling are discussed.
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 Value Of Uncertainty The Dealing With Risk In The Equity Derivatives Market written by George J Kaye and published by World Scientific Publishing Company. This book was released on 2012-11-16 with total page 438 pages. Available in PDF, EPUB and Kindle. Book excerpt: Along with the extraordinary growth in the derivatives market over the last decade, the impact of model choice, and model parameter usage, has become a major source of valuation uncertainty. This book concentrates on equity derivatives and charts, step by step, how key assumptions on the dynamics of stocks impact on the value of exotics. The presentation is technical, but maintains a strong focus on intuition and practical application./a
Download or read book The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions written by Jiri Podpiera and published by International Monetary Fund. This book was released on 2010-06-01 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper attempts to identify the fundamental variables that drive the credit default swaps during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004 - 08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.
Download or read book International Convergence of Capital Measurement and Capital Standards written by and published by Lulu.com. This book was released on 2004 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 Credit Default Swaps written by Marti Subrahmanyam and published by Now Publishers. This book was released on 2014-12-19 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit Default Swaps: A Survey is the most comprehensive review of all major research domains involving credit default swaps (CDS). CDS have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007-2009. The authors review the extant literature on CDS that has accumulated over the past two decades and divide the survey into seven topics after providing a broad overview in the introduction. The second section traces the historical development of CDS markets and provides an introduction to CDS contract definitions and conventions. The third section discusses the pricing of CDS, from the perspective of no-arbitrage principles, structural, and reduced-form credit risk models. It also summarizes the literature on the determinants of CDS spreads, with a focus on the role of fundamental credit risk factors, liquidity and counterparty risk. The fourth section discusses how the development of the CDS market has affected the characteristics of the bond and equity markets, with an emphasis on market efficiency, price discovery, information flow, and liquidity. Attention is also paid to the CDS-bond basis, the wedge between the pricing of the CDS and its reference bond, and the mispricing between the CDS and the equity market. The fifth section examines the effect of CDS trading on firms' credit and bankruptcy risk, and how it affects corporate financial policy, including bond issuance, capital structure, liquidity management, and corporate governance. The sixth section analyzes how CDS impact the economic incentives of financial intermediaries. The seventh section reviews the growing literature on sovereign CDS and highlights the major differences between the sovereign and corporate CDS markets. The eighth section discusses CDS indices, especially the role of synthetic CDS index products backed by residential mortgage-backed securities during the financial crisis. The authors close with our suggestions for promising future research directions on CDS contracts and markets.
Download or read book Volatility and Time Series Econometrics written by Mark Watson and published by Oxford University Press. This book was released on 2010-02-11 with total page 432 pages. Available in PDF, EPUB and Kindle. Book excerpt: A volume that celebrates and develops the work of Nobel Laureate Robert Engle, it includes original contributions from some of the world's leading econometricians that further Engle's work in time series economics
Download or read book A Guide to IMF Stress Testing written by Ms.Li L Ong and published by International Monetary Fund. This book was released on 2014-12-23 with total page 610 pages. Available in PDF, EPUB and Kindle. Book excerpt: The IMF has had extensive involvement in the stress testing of financial systems in its member countries. This book presents the methods and models that have been developed by IMF staff over the years and that can be applied to the gamut of financial systems. An added resource for readers is the companion CD-Rom, which makes available the toolkit with some of the models presented in the book (also located at elibrary.imf.org/page/stress-test-toolkit).
