Stock price default boundary: A Black-Cox model approach

Yukun Shi; Charalampos Stasinakis; Yaofei Xu; Cheng Yan; Xuan Zhang

doi:10.1016/j.irfa.2022.102284

Stock price default boundary: A Black-Cox model approach

Yukun Shi, Charalampos Stasinakis, Yaofei Xu, Cheng Yan, Xuan Zhang^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.

Original language	English
Article number	102284
Journal	International Review of Financial Analysis
Volume	83
DOIs	https://doi.org/10.1016/j.irfa.2022.102284
Publication status	Published - Oct 2022
Externally published	Yes

Keywords

Credit default swap
Default boundary
Implied volatility
Options
Unscented Kalman filter

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10.1016/j.irfa.2022.102284

Cite this

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title = "Stock price default boundary: A Black-Cox model approach",

abstract = "In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.",

keywords = "Credit default swap, Default boundary, Implied volatility, Options, Unscented Kalman filter",

author = "Yukun Shi and Charalampos Stasinakis and Yaofei Xu and Cheng Yan and Xuan Zhang",

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doi = "10.1016/j.irfa.2022.102284",

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T2 - A Black-Cox model approach

AU - Shi, Yukun

AU - Stasinakis, Charalampos

AU - Xu, Yaofei

AU - Yan, Cheng

AU - Zhang, Xuan

N1 - Funding Information: We are particularly grateful to the editor and two anonymous referees for their highly thoughtful and helpful comments and suggestions, which enable our work to achieve a substantial improvement. All errors are ours. Publisher Copyright: © 2022

PY - 2022/10

Y1 - 2022/10

N2 - In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.

AB - In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.

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KW - Implied volatility

KW - Options

KW - Unscented Kalman filter

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JO - International Review of Financial Analysis

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Stock price default boundary: A Black-Cox model approach

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