A Robust Method to Retrieve Option Implied Risk Neutral Densities for Defaultable Assets
Author | : Guillaume Leduc |
Publisher | : |
Total Pages | : 17 |
Release | : 2017 |
ISBN-10 | : OCLC:1305539881 |
ISBN-13 | : |
Rating | : 4/5 (81 Downloads) |
Download or read book A Robust Method to Retrieve Option Implied Risk Neutral Densities for Defaultable Assets written by Guillaume Leduc and published by . This book was released on 2017 with total page 17 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risk neutral densities recovered from option prices can be used to infer market participantsņ expectations of future stock returns and are a vital tool for pricing illiquid exotic options. Although there is a broad literature on the subject, most studies do not address the likelihood of default. To fill this gap, in this paper we develop a novel method to retrieve the risk neutral probability density function from call options written on a defaultable asset. The primary advantage of the method is that default probabilities inferred by the model can be analytically expressed and, if available, can be incorporated as an input in a ፟lexible, robust and easily implementable manner.