The Option-iPoD
August 1, 2008
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Summary
We present a framework to derive the probability of default implied by the price of equity options. The framework does not require any strong statistical assumption, and provide results that are informative on the expected developments of balance sheet variables, such as assets, equity and leverage, and on the Greek letters (delta, gamma and vega). We show how to extend the framework by using information from the price of a zero-coupon bond and CDS-spreads. In the episode of the collapse of Bear Stearns, option-iPoD was able to early signal market sentiment.
Subject: Asset prices, Asset valuation, Financial statements, Options, Stocks
Keywords: WP, zero-coupon bond
Pages:
29
Volume:
2008
DOI:
Issue:
194
Series:
Working Paper No. 2008/194
Stock No:
WPIEA2008194
ISBN:
9781451870527
ISSN:
1018-5941
