A0356
Title: A comparison of probabilities of default inferred from option prices and credit default swaps
Authors: Ana Monteiro - University of Coimbra (Portugal) [presenting]
Antonio Santos - University of Coimbra (Portugal)
Abstract: Credit default swaps and option prices could reveal market expectations about stock price behavior and the probability of default. In order to estimate this probability of default, parametric models are applied, namely a delta-lognormal density and a mixture of two lognormal densities augmented with a probability of default. The resulting optimization problems incorporate various restrictions in order to guarantee proper results. The performance of the Merton distance to default (DD) model, which is based on Merton's option pricing model, to compute the probability of default is also analyzed. The models are tested by calibrating them to credit default swap and option prices from technological firms.
