Debt rollover-induced local volatility model

This paper introduces a structural scenario-based model with debt rollover risk and a higher-fidelity treatment of the bankruptcy procedure. The emerging stock price process is a generalized Brownian motion with state-dependent local volatility, and the resultant implied volatility smile is due exclusively to structural features (debt rollover and credit risks). Therefore, the model reinforces structural foundations of local volatility option pricing models. The paper advocates a joint modeling and calibration framework for multiple classes of derivatives on the firm’s asset value. In particular, an empirical application to Solar City equity and stock option valuation demonstrates the versatility and efficiency gains of the suggested model.

     

Conditional dependence in post-crisis markets: dispersion and correlation skew trades

Review of Quantitative Finance and Accounting - Strengthening of asset return dependence during the 2007–2008 credit crisis highlighted its dynamic and conditional nature. Option prices...     

The risk management implications of using end of day consensus pricing for single name CDS

Review of Quantitative Finance and Accounting - When markets are opaque, market participants rely to a large extent on end-of-day consensus prices published by service providers; such as in the...