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 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 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 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 Estimating Default Probabilities Implicit in Equity Prices written by Robert A. Jarrow and published by . This book was released on 2012 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses a reduced form credit risk model to estimate default probabilities implicit in equity prices. For a cross-section of firms, a time-series regression of monthly equity returns is estimated. We show that it is feasible to infer the firm's probability of default implicit in equity returns. However, the existence of price bubbles and the difficulty in modeling equity price risk premium confound the estimation of these default probabilities, generating potentially biased estimates with large standard errors. Comparing these default intensities with those obtained from historical data or implicitly from debt prices confirms this result.
Download or read book Advanced Option Pricing Models written by Jeffrey Owen Katz and published by McGraw Hill Professional. This book was released on 2005-03-21 with total page 449 pages. Available in PDF, EPUB and Kindle. Book excerpt: Advanced Option Pricing Models details specific conditions under which current option pricing models fail to provide accurate price estimates and then shows option traders how to construct improved models for better pricing in a wider range of market conditions. Model-building steps cover options pricing under conditional or marginal distributions, using polynomial approximations and “curve fitting,” and compensating for mean reversion. The authors also develop effective prototype models that can be put to immediate use, with real-time examples of the models in action.
Download or read book Systemic Contingent Claims Analysis written by Mr.Andreas A. Jobst and published by International Monetary Fund. This book was released on 2013-02-27 with total page 93 pages. Available in PDF, EPUB and Kindle. Book excerpt: The recent global financial crisis has forced a re-examination of risk transmission in the financial sector and how it affects financial stability. Current macroprudential policy and surveillance (MPS) efforts are aimed establishing a regulatory framework that helps mitigate the risk from systemic linkages with a view towards enhancing the resilience of the financial sector. This paper presents a forward-looking framework ("Systemic CCA") to measure systemic solvency risk based on market-implied expected losses of financial institutions with practical applications for the financial sector risk management and the system-wide capital assessment in top-down stress testing. The suggested approach uses advanced contingent claims analysis (CCA) to generate aggregate estimates of the joint default risk of multiple institutions as a conditional tail expectation using multivariate extreme value theory (EVT). In addition, the framework also helps quantify the individual contributions to systemic risk and contingent liabilities of the financial sector during times of stress.
Download or read book Probabilities of Default and the Market Price of Risk in a Distressed Economy written by Miguel A. Segoviano Basurto and published by International Monetary Fund. This book was released on 2011-04-01 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose an original method to estimate the market price of risk under stress, which is needed to correct for risk aversion the CDS-implied probabilities of distress. The method is based, for simplicity, on a one-factor asset pricing model. The market price of risk under stress (the expectation of the market price of risk, conditional on it exceeding a certain threshold) is computed from the price of risk (which is the variance of the market price of risk) and the discount factor (which is the inverse of the expected market price of risk). The threshold is endogenously determined so that the probability of the price of risk exceeding it is also the probability of distress of the asset. The price of risk can be estimated via different methods, for instance derived from the VIX or from the factors in a Fama-MacBeth regression.
Download or read book Firm Valuation and Default Probability Through Exotic Barrier Options written by Gastón Silverio Milanesi and published by . This book was released on 2019 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Real option theory allows using financial option models to value investments and firms. Traditional models present a substantial problem to positively correlate underlying asset volatility with firm value. Therefore, an alternative approach is used based on a particular type of exotic option, the barrier one. This dynamic model helps estimating default probability incorporating the negative impact that excessive risk has on firm value. The article presents a hypothetical example illustrating similarities and differences between the proposed model and the traditional version. Finally, this model is applied on two of the leading companies in the Argentinean capital market which are characterized by different levels of leverage demonstrating the robustness of the results. The predicted default probability increases with the rise in assets volatility and the time horizon of debt maturity.
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 Empirical Capital Structure written by Christopher Parsons and published by Now Publishers Inc. This book was released on 2009 with total page 107 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical Capital Structure reviews the empirical capital structure literature from both the cross-sectional determinants of capital structure as well as time-series changes.
Download or read book Managing Portfolio Credit Risk in Banks written by Arindam Bandyopadhyay and published by Cambridge University Press. This book was released on 2016-05-09 with total page 390 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit risk is the risk resulting from the uncertainty that a borrower or a group of borrowers may be unwilling or unable to meet their contractual obligations as per the agreed terms. It is the largest element of risk faced by most banks and financial institutions. Potential losses due to high credit risk can threaten a bank's solvency. After the global financial crisis of 2008, the importance of adopting prudent risk management practices has increased manifold. This book attempts to demystify various standard mathematical and statistical techniques that can be applied to measuring and managing portfolio credit risk in the emerging market in India. It also provides deep insights into various nuances of credit risk management practices derived from the best practices adopted globally, with case studies and data from Indian banks.
Download or read book Explaining the Level of Credit Spreads written by Martijn Cremers and published by . This book was released on 2005 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Credit Risk Modeling using Excel and VBA written by Gunter Löeffler and published by John Wiley & Sons. This book was released on 2011-01-31 with total page 372 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is common to blame the inadequacy of credit risk models for the fact that the financial crisis has caught many market participants by surprise. On closer inspection, though, it often appears that market participants failed to understand or to use the models correctly. The recent events therefore do not invalidate traditional credit risk modeling as described in the first edition of the book. A second edition is timely, however, because the first dealt relatively briefly with instruments featuring prominently in the crisis (CDSs and CDOs). In addition to expanding the coverage of these instruments, the book will focus on modeling aspects which were of particular relevance in the financial crisis (e.g. estimation error) and demonstrate the usefulness of credit risk modelling through case studies. This book provides practitioners and students with an intuitive, hands-on introduction to modern credit risk modelling. Every chapter starts with an explanation of the methodology and then the authors take the reader step by step through the implementation of the methods in Excel and VBA. They focus specifically on risk management issues and cover default probability estimation (scoring, structural models, and transition matrices), correlation and portfolio analysis, validation, as well as credit default swaps and structured finance. The book has an accompanying website, https://creditriskmodeling.wordpress.com/, which has been specially updated for this Second Edition and contains slides and exercises for lecturers.
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 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 Risk Analysis Probability of Default written by Giuseppe Montesi and published by . This book was released on 2015 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a stochastic simulation model for estimating forward-looking corporate probability of default and loss given default. We formulate the model in a discrete time frame, apply capital-budgeting techniques to define the relationships that identify the default condition, and solve the model by Monte Carlo simulation. First, we present the model; then we show how to extend the model to estimate company specific loss given default, expected loss and unexpected loss as well. Subsequently, we compare the RAPD model with option/contingent models, inasmuch as both models use the same definition of the event of default. The focus of this paper is on the theoretical and modeling aspects of the new methodological approach proposed; however we also present an application of the method that represents just one example of its possible implementations, and the results of a comparative test (covering RAPD, Altman Z-score, two option-contingent models and S&P ratings) which in our opinion constitutes a preliminary positive empirical support of the validity of the RAPD Approach. Conclusive remarks end the paper.
