In this paper, we present a novel method to extract the risk-neutral probability of default of a firm from American put option prices. Building on the idea of a default corridor proposed in Carr and Wu (2011), we derive a parsimonious closed-form formula for American put option prices from which...

There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability. We introduce a simple...

Figlewski [2002] has pointed out that there is nothing special about the Black–Scholes equation if the model is used for interpolation. Figlewski introduced a single-parameter alternative function. This function was extended by Henderson, Hobson, and Kluge [2007] to incorporate maturity....