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Firm-specific risk-neutral distributions with options and CDS

Author

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  • Sirio Aramonte
  • Mohammad Jahan-Parvar
  • Samuel Rosen
  • John W. Schindler

Abstract

We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Taken together, but not in isolation, options and CDS span the intermediate part of the distribution, which is driven by exposure to the risk of large but not extreme returns. Through a series of asset-pricing tests, we show that this intermediate-return risk carries a premium, particularly at times of heightened market stress.

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  • Sirio Aramonte & Mohammad Jahan-Parvar & Samuel Rosen & John W. Schindler, 2021. "Firm-specific risk-neutral distributions with options and CDS," BIS Working Papers 921, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:921
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    More about this item

    Keywords

    risk neutral distributions; investor expectations; CDS spreads;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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