A simple method for extracting the probability of default from American put option prices (eBook, 2020) [WorldCat.org]
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A simple method for extracting the probability of default from American put option prices

Author: Bo-Young Chang; Bank of Canada,
Publisher: Ottawa, Ontario, Canada : Bank of Canada = Banque du Canada, 2020. ©2020
Series: Staff working paper (Bank of Canada), 2020-15.
Edition/Format:   eBook : Document : National government publication : EnglishView all editions and formats
Summary:
"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  Read more...
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Details

Genre/Form: Electronic books
Material Type: Document, Government publication, National government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Bo-Young Chang; Bank of Canada,
OCLC Number: 1153955717
Notes: Distributed by the Government of Canada Publishing and Depository Services Program (Weekly acquisitions list 2019-XX)
"Last updated: April 20, 2020."
Cover title.
Description: 1 online resource (ii, 19 pages) : colour charts.
Series Title: Staff working paper (Bank of Canada), 2020-15.
Responsibility: by Bo Young Chang and Greg Orosi.
More information:

Abstract:

"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.

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