We develop a simple robust link between deep out-of-the-money American put options on a company's stock and a credit insurance contract on the company's bond. We assume that the stock price stays above a barrier B before default but drops below a lower barrier $A$ after default, thus generating...

Loss functions are widely used to calibrate option pricing models to cross-sectional derivatives quotes. However, these approaches come with the disadvantage that estimated model parameters often appear to lack stability over time. On small option markets, this sign of over-fitting is typically...

We propose a novel method of estimating default probabilities using equity option data. The resulting default probabilities are highly correlated with estimates of default probabilities extracted from CDS spreads, which assume constant recovery rates. Additionally, the option implied default...

We develop a new option pricing framework that tightly integrates with how institutional investors manage options positions. The framework starts with the near-term dynamics of the implied volatility surface and derives no-arbitrage constraints on its current shape. Within this framework, we...

This paper examines the properties of the variance risk premium (VRP). We propose a flexible asset pricing model that captures co-jumps in prices and volatility, and self-exciting jump clustering. We estimate the model on equity returns and variance swap rates at different horizons. The total...

We estimate the default probabilities implicit in the transaction prices of a new type of call provision, the make whole call. The new issuance of make whole callable bonds has supplanted that of traditional callable bonds and noncallable bonds. Make whole callable bonds have strike prices that...

This article provides a mathematical and empirical investigation of the reasons for the presence of skewness and kurtosis in financial data. The results indicate that this phenomenon is triggered by higher-order moment dependencies in the data, such as asymmetric and conditional volatility....

We document that properly scaled deviations from put-call parity estimate the contribution of market frictions to expected returns (CFER) accurately, by means of a non-parametric theoretically founded identification strategy. The required conditions are that our estimator predicts the underlying...

We analyze in detail calibration and pricing performed within the framework of local stochastic volatility LSV models, which have become the industry market standard for FX and equity markets. We present the main arguments for the need of having such models, and address the question whether...