In the study we present a fairly generalized two-level option tree that is capable of pricing credit-linked vanilla plain European/American and path-dependent options. The main contribution is thus an extension of a classical binomial tree methodology to a framework within which the underlying...

We present the non-Gaussian extension of the traditional Merton framework, which takes into account slowly relaxing fluctuations of the volatility of the firm's market value of financial assets. The minimal version of the model depends on the Tsallis entropic parameter q and the generalized...

This paper studies the effects of default risk on equity option returns. We show that there is a cross-sectional and a time-series relation between default risk and option returns. In the cross-section, expected delta-hedged equity option returns have a negative relation with default risk...

In this paper, we present a novel method to extract the risk-neutral probability of default from American put option prices. Under the assumptions of Carr and Wu (2011), we derive a closed form expression for American put options from which the probability of default can be inferred. Our...