DefaultRisk.com the web's biggest credit risk modeling resource. | 
|
|
|
| Individual Stock-Option Prices and Credit Spreads by Martijn Cremers of the Yale School of Management, January 2006 Abstract: This paper introduces measures of volatility and jump risk that are based on individual stock options to explain credit spreads on corporate bonds. Implied volatilities of individual options are shown to contain important information for credit spreads and improve on both implied volatilities of index options and on historical volatilities when explaining the crosssectional and time-series variation in a panel of corporate bond spreads. Both the level of individual implied volatilities and the implied-volatility skew matter for credit spreads. The empirical estimates are in line with the coefficients predicted by a theoretical structural firm value model. Importantly, detailed principal component analysis shows that our newly constructed determinants of credit spreads reverse the finding in the literature that structural models leave a large part of the variation in credit spreads unexplained. Furthermore, our results indicate that option-market liquidity has a spillover effect on the short-maturity corporate bond market, and we show that individual option prices contain information on the likelihood of rating migrations. Books Referenced in this Paper: (what is this?)
Download paper (373K PDF) 55 pages
[Home] [Credit Pricing Papers]  |   
|
Please contact me with problems or suggestions. |
