This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, the authors establish arbitrage-based bounds on prime and score prices. They then develop a new nonparametric statistical technique to test whether prime and score...

This paper demonstrates that Black-Scholes implied volatilities can be used to value options in many situations where the assumptions of the Black-Scholes model are violated, including (1) alternative stock processes, (2) stochastic interest rates, and (3) market frictions. Given its...

This paper develops a structural credit risk model to characterize the difference between the economic and recorded default times for a firm. Recorded default occurs when default is recorded in the legal system. The economic default time is the last time when the firm is able to pay off its debt...