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Pricing Options on Defaultable Stocks


  • E. Bayraktar


† 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.

Suggested Citation

  • E. Bayraktar, 2008. "Pricing Options on Defaultable Stocks," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(3), pages 277-304.
  • Handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:277-304
    DOI: 10.1080/13504860701798283

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    Cited by:

    1. Andrea De Martino & Edward Manuel Ruiz Crosby & Roberto Stagni, 2017. "A unified framework for pricing credit and equity derivatives," Working Papers 2017-116, Peruvian Economic Association.
    2. repec:wsi:ijtafx:v:15:y:2012:i:08:n:s0219024912500598 is not listed on IDEAS
    3. Claudio Fontana & Juan Miguel A. Montes, 2012. "A unified approach to pricing and risk management of equity and credit risk," Papers 1212.5395,, revised May 2013.
    4. Tim Leung & Peng Liu, 2012. "Risk Premia And Optimal Liquidation Of Credit Derivatives," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(08), pages 1-34.


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