We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors. The price of a CDS option can be uniformly approximated by...

The aim of this paper is to extract credit-risk sensitive information from the quotes of equity options and CDSs. In particular, we wish to estimate the firm's leverage, as it is perceived by traders. This goal is achieved within a model à la Leland (1994), where stockholders have a perpetual...

A credit-linked note (CLN) on a tranche of the CDX index (partially) protects the holder against default losses in that tranche. The holder receives a specified redemption amount at note maturity. The note is priced using market spread quotes for a matching CDS on this tranche

This study combines the empirical estimation of a Double-Exponential Jump-Diffusion (DEJD) process for a CDS index and the use of estimated parameters to price options on the index. In the first step we find Maximum Likelihood estimates for the diffusion volatility, the Poisson jump frequencies,...

Recently, the advantages of conformal deformations of the contours of integration in pricing formulas were demonstrated in the context of wide classes of Levy models and the Heston model. In the present paper we construct efficient conformal deformations of the contours of integration in the...

In this paper we present two (semi)-analytic synthetic CDO tranche pricing formulas using a subordinator Levy Marshall-Olkin credit correlation model. These formulas can be easily evaluated in terms of machine computational time, therefore they are particularly suitable for the correlation model...

We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Together but not in isolation, options...

We investigate whether a model with time-varying probability of economic disaster can explain prices of collateralized debt obligations. We focus on senior tranches of the CDX, an index of credit default swaps on investment grade firms. These assets do not incur losses until a large fraction of...

Cross-market deviations in equity put option prices and credit default swap spreads are temporal and revert to their usual level shortly after they occur, on average within about one week. The process of reversion involves predictable and economically significant changes also in the equity...