A. Takeyama, N. Constantinou, and D. Vinogradov: A Framework for Extracting the Probability of Default from Listed Stock Option Prices

November 14, 2011

This paper develops a framework to estimate the probability of default (PD) implied in listed stock options. The underlying option pricing model measures PD as the intensity of the jump diffusion that the underlying stock price becomes zero. We adopt a two stage calibration algorithm to obtain the precise estimator of PD. In the calibration procedure, we improve the fitness of the option pricing model via the implementation of the time inhomogeneous term structure model in the option pricing model.