Journal of Credit Risk

Risk.net

Better ingredients

Christopher Finger, Robert Stamicar

ABSTRACT

MOTIVATION – A FEW QUESTIONS Hull, Nelken, and White (2005) establish that a variant of the Merton model of credit calibrated to equity options can differentiate credit quality in cross sections; the performance of this model is better than that of a similar model calibrated instead to historical equity volatility. Beyond differentiating credit spreads across different names, this work raises the question of whether equity option data can aid in tracking the specific spread levels for individual names. Additionally, it raises the question of whether information in the option skew can be used to improve on fundamental approaches to assessing the leverage for individual firms.

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