Updating the Option Implied Probability of Default Methodology
In this paper we ‘update’ the option implied probability of default (option iPoD) approach recently suggested in the literature. First, a numerically more stable objective function for the estimation of the risk neutral density is derived whose integrals can be solved analytically. Second, it is reasoned that the originally proposed approach for the estimation of the PoD has some serious drawbacks and hence an alternative procedure is suggested that is based on the Lagrange multipliers. Carrying out numerical evaluations and a practical application we find that the framework provides very promising results.
|Date of creation:||12 Oct 2011|
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- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
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- Knaup, M., 2011. "Market-based measures of bank risk and bank aggressiveness," Other publications TiSEM cff93cd4-1955-40ab-a3c0-a, Tilburg University, School of Economics and Management.
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- Christian Capuano, 2008. "The Option-iPoD," IMF Working Papers 08/194, International Monetary Fund.
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