Explaining the level of credit spreads
Subtitle: option-implied jump risk premia in a firm value model
By: Martijn Cremers ... [et al.].
Contributors: Bank for International Settlements. Monetary and Economic Department
Series: BIS working papers -- no. 191; BIS working papers (Online) -- no. 191.
Publisher: Bank for International Settlements
Published: 2005
Place of publication: Basel, Switzerland
Language: eng
Format: [electronic resource] :
Description: "Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S&P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels."
Notes: Title from PDF file (viewed on Jan. 3, 2006).

"Monetary and Economic Department."

"November 2005."

Includes bibliographical references.

Also available in print.

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Mode of access: World Wide Web.