Arbeitspapier
Equity option-implied probability of default and equity recovery rate
There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability. We introduce a simple method to detect stocks with positive expected equity recovery by examining option prices and propose a method to extract the default probability from option prices that allows for positive equity recovery. We demonstrate possible applications of our methodology with examples that include large financial institutions in the United States during the 2007-09 subprime crisis.
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Canada Staff Working Paper ; No. 2016-58
- Classification
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Wirtschaft
Contingent Pricing; Futures Pricing; option pricing
Bankruptcy; Liquidation
- Subject
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Asset pricing
Financial markets
Market structure and pricing
- Event
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Geistige Schöpfung
- (who)
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Chang, Bo Young
Orosi, Greg
- Event
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Veröffentlichung
- (who)
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Bank of Canada
- (where)
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Ottawa
- (when)
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2016
- DOI
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doi:10.34989/swp-2016-58
- Handle
- Last update
-
10.03.2025, 11:41 AM CET
Data provider
This object is provided by:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Chang, Bo Young
- Orosi, Greg
- Bank of Canada
Time of origin
- 2016
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