In this paper, we provide an alternative framework for constructing an arbitrage-free European-style option surface. The main motivation for our work is that such a construction has rarely been achieved in the literature so far. The novelty of our approach is that we perform the calibration and...

Risk neutral densities recovered from option prices can be used to infer market participants expectations of future stock returns and are a vital tool for pricing illiquid exotic options. Although there is a broad literature on the subject, most studies do not address the likelihood of default....

Based on the result of Orosi (2014), we derive an improved lower bound for European-style put options written on defaultable assets. Furthermore, we establish two additional no-arbitrage conditions, one for European-style puts and one for calls, which are tighter than the ones commonly reported...

This paper provides an improved model-independent lower bound of European call options written on defaultable assets. Based on static arbitrage arguments, improved lower bounds are established, which also depend on the probability of option implied default. The results are also extended to...

In this work, we suggest a novel quadratic programming-based algorithm to generate an arbitrage-free call option surface. Our approach relies on a regression spline-based implementation of the framework proposed by Orosi (2011) who presents a multi-parameter extension of the models of Figlewski...

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...

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...