Equity Option Implied Probability of Default and Equity Recovery Rate

The term structure of equity option implied volatility

This paper investigates the relationship between the slope of the implied volatility (IV) term structure and future option returns. In Fama-Macbeth regressions we demonstrate that implied volatility slopes are positively correlated with future returns on short-term at-the-month straddles. A strategy that buys straddles with high IV slopes and short sells straddles with low IV slopes returns sev...

Updating the option implied probability of default methodology

In this paper we ‘update’ the option implied probability of default (option iPoD) approach recently suggested in the literature. First, a numerically more stable objective function for the estimation of the risk neutral density is derived whose integrals can be solved analytically. Second, it is reasoned that the originally proposed approach for the estimation of the PoD has some serious drawba...

Dependence of Default Probability and Recovery Rate in Structural Credit Risk Models: Empirical Evidence from Greece

The main idea of this paper is to study the dependence between the probability of default and the recovery rate on credit portfolio and to seek empirically this relationship. We examine the dependence between PD and RR by theoretical approach. For the empirically methodology, we use the bootstrapped quantile regression and the simultaneous quantile regression. These methods allow to determinate...

The Cross Section of Equity Implied Variance

The implied variances of 167 firms are examined over the period 1991 through 1995. The traditional market model of returns is shown to be a good first order model for explaining the cross section of variances though firm specific variances appear to exhibit stronger covariance than the market model predicts. The existence of a positive bias over realized and forecast variances is documented. Th...

Equity correlations implied by index options