Pricing Options on Defaultable Stocks
Abstract
† Stock option price approximations are developed for a model which takes both the risk of default and the stochastic volatility into account. The intensity of defaults is assumed to be influenced by the volatility. It is shown that it might be possible to infer the risk neutral default intensity from the stock option prices. The proposed option price approximation has a rich implied volatility surface structure and fits the data implied volatility well. A calibration exercise shows that an effective hazard rate from bonds issued by a company can be used to explain the impliedvolatility skew of the option prices issued by the same company. It is also observed that the implied yield spread obtained from calibrating all the model parameters to the option prices matches the observed yield spread.Download Info
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Bibliographic Info
Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 15 (2008)
Issue (Month): 3 ()
Pages: 277-304
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Handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:277-304
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For corrections or technical questions regarding this item, or to correct its listing, contact: (Michael McNulty).
Related research
Keywords: Option pricing; multiscale perturbation methods; defaultable stocks; stochastic intensity of default; implied volatility skew;References
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Tim Leung & Peng Liu, 2011. "Risk Premia and Optimal Liquidation of Defaultable Securities," Quantitative Finance Papers 1110.0220, arXiv.org.
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