Pricing Options on Defaultable Stocks*

DOI10.1080/13504860701798283zbMATH Open1142.91504arXiv0707.0336OpenAlexW2015134771MaRDI QIDQ3523656FDOQ3523656

Erhan Bayraktar

Publication date: 5 September 2008

Published in: Applied Mathematical Finance (Search for Journal in Brave)

Abstract: In this note, we develop stock option price approximations for a model which takes both the risk o default and the stochastic volatility into account. We also let the intensity of defaults be influenced by the volatility. We show that it might be possible to infer the risk neutral default intensity from the stock option prices. Our option price approximation has a rich implied volatility surface structure and fits the data implied volatility well. Our calibration exercise shows that an effective hazard rate from bonds issued by a company can be used to explain the implied volatility skew of the implied volatility of the option prices issued by the same company.

Full work available at URL: https://arxiv.org/abs/0707.0336

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• scientific article; zbMATH DE number 7088115
• scientific article; zbMATH DE number 1222796

zbMATH Keywords

option pricingimplied volatility skewmultiscale perturbation methodsdefaultable stocksstochastic intensity of default

Mathematics Subject Classification ID

Microeconomic theory (price theory and economic markets) (91B24)

Cites Work

• Financial Modelling with Jump Processes
• Singular Perturbations in Option Pricing
• Title not available (Why is that?)
• Multiscale Stochastic Volatility Asymptotics
• Option pricing when underlying stock returns are discontinuous
• A jump to default extended CEV model: an application of Bessel processes
• PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY

Cited In (8)

• A UNIFIED FRAMEWORK FOR PRICING CREDIT AND EQUITY DERIVATIVES
• Option price when the stock is a semimartingale
• Implied Volatility of Leveraged ETF Options
• Title not available (Why is that?)
• Market implied volatilities for defaultable bonds
• Title not available (Why is that?)
• Title not available (Why is that?)
• A unified approach to pricing and risk management of equity and credit risk

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