A simple method for extracting the probability of default from American put option prices / by Bo Young Chang and Greg Orosi.: FB3-5/2020-15E-PDF
"In this paper, we present a novel method to extract the risk-neutral probability of default of a firm from American put option prices. Building on the idea of a default corridor proposed in Carr and Wu (2011), we derive a parsimonious closed-form formula for American put option prices from which the probability of default can be inferred. The proposed method is easy to implement and helps overcome the main limitation of the method used in Carr and Wu (2011), which relies on the price of one deep-out-of-the-money put option. Our empirical results are based on seven large U.S. firms for the period 2002 to 2010. These results show that, in some cases, the option-implied probability of default can provide a more accurate estimate of default probability, compared to the estimates implied from credit default swap spreads"--Abstract.
Permanent link to this Catalogue record:
publications.gc.ca/pub?id=9.886422&sl=0
| Department/Agency | Bank of Canada. |
|---|---|
| Title | A simple method for extracting the probability of default from American put option prices / by Bo Young Chang and Greg Orosi. |
| Series title | Staff working paper = Document de travail du personnel, 1701-9397 ; 2020-15 |
| Publication type | Series - View Master Record |
| Language | [English] |
| Format | Electronic |
| Electronic document | |
| Note(s) | Cover title. Includes bibliographical references (pages 10-11). |
| Publishing information | Ottawa, Ontario, Canada : Bank of Canada = Banque du Canada, 2020. ©2020 |
| Author / Contributor | Chang, Bo-Young, author. |
| Description | 1 online resource (iii, 19 pages) : colour charts. |
| Catalogue number |
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| Subject terms | Stock options -- United States. Options (Finance) -- United States. Options d'achat d'actions -- États-Unis. Options (Finances) -- États-Unis. |