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arXiv · 0707.0336

Pricing Options on Defaultable Stocks

Erhan Bayraktar
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Abstract

In this note, we develop stock option price approximations for a model which takes both the risk o default and the stochastic volatility into account. We also let the intensity of defaults be influenced by the volatility. We show that it might be possible to infer the risk neutral default intensity from the stock option prices. Our option price approximation has a rich implied volatility surface structure and fits the data implied volatility well. Our calibration exercise shows that an effective hazard rate from bonds issued by a company can be used to explain the implied volatility skew of the implied volatility of the option prices issued by the same company.

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Erhan Bayraktar. 2007-12-21. Pricing Options on Defaultable Stocks. https://arxiv.org/abs/0707.0336

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