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The option-iPoD. The Probability of Default Implied by Option Prices based on Entropy

The option-iPoD. The Probability of Default Implied by Option Prices based on Entropy by Christian Capuano
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We present a framework to derive the probability of default implied by the price of equity options. The framework does not require any strong statistical assumption, and provide results that are informative on the expected developments of balance sheet variables, such as assets, equity and leverage, and on the Greek letters (delta, gamma and vega). We show how to extend the framework by using information from the price of a zero-coupon bond and CDS-spreads. In the episode of the collapse of Bear Stearns, option-iPoD was able to early signal market sentiment.
International Monetary Fund; August 2008
29 pages; ISBN 9781451991321
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Title: The option-iPoD. The Probability of Default Implied by Option Prices based on Entropy
Author: Christian Capuano
 
ISBNs
1451991320
9781451870527
9781451915051
9781451991321