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.
Recommendations
- The valuation of options when the market price of default risk involved
- Pricing American put options on defaultable bonds
- Option Pricing
- Pricing of forward-start options with default risks
- The pricing of basket options with default risk
- Pricing of fixed-strike lookback options on assets with default risk
- Option pricing when underlying stock returns are discontinuous
- The pricing of options and corporate liabilities
- scientific article; zbMATH DE number 7088115
- scientific article; zbMATH DE number 1222796
Cites work
- scientific article; zbMATH DE number 1517499 (Why is no real title available?)
- A jump to default extended CEV model: an application of Bessel processes
- Financial Modelling with Jump Processes
- Multiscale Stochastic Volatility Asymptotics
- Option pricing when underlying stock returns are discontinuous
- PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY
- Singular Perturbations in Option Pricing
Cited in
(10)- Option price when the stock is a semimartingale
- scientific article; zbMATH DE number 5759642 (Why is no real title available?)
- Market implied volatilities for defaultable bonds
- PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY
- Implied volatility of leveraged ETF options
- A unified framework for pricing credit and equity derivatives
- Local volatility enhanced by a jump to default
- scientific article; zbMATH DE number 7088119 (Why is no real title available?)
- scientific article; zbMATH DE number 7088115 (Why is no real title available?)
- A unified approach to pricing and risk management of equity and credit risk
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