This paper addresses the relationship between stock markets and credit default swaps (CDS) markets. In particular, I aim to gauge if the co-movement between stock prices and sovereign CDS spreads increases with the deterioration of the credit quality of sovereign debt. The analysis of...

The accuracy of measuring credit risk directly decides on the interest on credit, which has to be paid when raising a credit, and the amount of capital to keep in reserve by a firm. The structural credit risk model proposed by Merton (1974) lays the groundwork for the assessment of a firm's...

This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial...

This paper presents empirical evidence that the corporate bond market is forward looking with respect to volatility. I use the Merton (1974) model to calculate a measure of implied volatility from corporate bond yield spreads. I find that corporate bond transaction prices contain substantial...

This work empirically examines six structural models of the term structure of credit risk spreads: Merton (1974), Longstaff & Schwartz (1995) (with and without stochastic interest rates), Leland & Toft (1996), Collin-Dufresne & Goldstein (2001), and a constant elasticity of variance model. The...

This paper explores the impact of volatility estimation methods on theoretical option values based upon the Black-Scholes-Merton (BSM) model. Volatility is the only input used in the BSM model that cannot be observed in the market or a priori determined in a contract. Thus, properly calculating...