- Thursday 2 Jun 2022, 12:00 - 13:00
- Spoken Language
We discuss the idea of jump-to-default in stock prices and its modelling as a Bessel process under EMM. The implication of a non-central chi-square distribution in option price is tested using some U.S. stock option data.
(joint with Chen Ying)
We find that a significant component of default intensity related to volatility that is much larger than that implied by associated credit default swap spreads. The implied volatility under the Bessel process is also mostly higher than that implied by lognormal diffusion.
There are also systematic biases in the option prices when they are in-the-money or out-of-the-money. We provide some insights into how the extended CEV jump-to-default model may improve on the CEV model and how some issues remain to be addressed.
The inconsistent default intensity implications from the CDS market and the stock options market are also discussed.