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Stock price default boundary: A Black-Cox model approach

Author

Listed:
  • Shi, Yunkun
  • Stasinakis, Charalampos
  • Xu, Yaofei
  • Yan, Cheng
  • Zhang, Xuan

Abstract

In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.

Suggested Citation

  • Shi, Yunkun & Stasinakis, Charalampos & Xu, Yaofei & Yan, Cheng & Zhang, Xuan, 2022. "Stock price default boundary: A Black-Cox model approach," International Review of Financial Analysis, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finana:v:83:y:2022:i:c:s105752192200240x
    DOI: 10.1016/j.irfa.2022.102284
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit default swap; Default boundary; Implied volatility; Options; Unscented Kalman filter;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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