A Measure on Credit Option Adjusted Spread by Incorporating Stock Option Premium
Date Issued
2006
Date
2006
Author(s)
Weng, Yen-Hung
DOI
zh-TW
Abstract
Over the past decade, Merton model plays a role of fundamental model to quantify the credit risk. As firm value is not traded asset, Merton model derives the asset implied volatility and default probability based on long-term economic equilibrium. Suppose we live in a mature capital market and all the market data from stock, bond and stock option can be observed. Due to market segmentation, the study extracts the un-equilibrium within the Merton model to define the implied credit risk measure. And we use this measure to tell the difference of credit spread of a corporate bond and model-derived credit risk as a reference of dynamic trading timing. In this study we introduce Merton model and KMV model first. Then substitute the stock and bond price for the model as well as incorporating the implied volatility from stock option. Reasonably, we can calculate the expected loss of the bond as implied credit risk. Furthermore, we make the scenario of the implied credit risk with respect to the stock price, bond price and the stock implied volatility and making a comment about applying the derived risk on the market. In the last part of the study, we make the relaxation on stock price probability density function to meet the volatility skew observed on the market. Then apply the new stock price density function on calculating the implied credit risk and compare with the risk from previous density function.
Subjects
選擇權調整信用價差
隱含信用風險
信用風險
Credit OAS
option adjusted spread
credit risk
Type
thesis