This paper develops a family of option pricing models when the underlying stock price dynamic is modelled by a regime switching process in which prices remain in one volatility regime for a random amount of time before switching over into a new regime. Our family includes the regime switching...

Recent advances in asset pricing - the reduced form approach to pricing risk debt and derivatives - are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed and floating rate subordinated debt provide...

Recent advances in asset pricing - the reduced-form approach to pricing risky debt and derivatives - are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed- and floating-rate subordinated debt provide...

Predictions of firm-level credit spreads based on the current spot and forward credit spreads can be significantly improved upon by using the information contained in the shape of the creditspread curve. However, the current credit-spread curve is not a sufficient statistic for predicting future...

This article presents a modification of Merton’s (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis...

<section xml:id="fut21616-sec-0001"> This study uses equilibrium arguments to derive closed‐form solutions for the price of European call and put options written on an individual stock when shareholders might lose all their claims on the firm. The stock price accounts for both a random probability of bankruptcy and a random...</section>