| Summary: | 碩士 === 國立中興大學 === 財務金融系所 === 96 === In 1973, Black and Scholes proposed an option pricing formula for a simple European call option, followed by Merton in 1974, who extended this model’s concept and regarded the company’s equity as a call option on its assets, the debt value of this company as a strike price. Using option-based structural model, one can estimate the firm’s theoretical probability of default, capital structure and credit spread.
Merton’s model used equity price and equity return’s volatility from stock market to measure credit risk and estimate probability of default and credit spread. However, in 1977 , Geske proposed that the underlying asset of equity call is firm’s stock and the underlying asset of this stock is firm’s value, so we can regard equity call as a compound option. Furthermore, by using compound option’s model, we can measure credit risk. In a word, there are two ways to measure credit risk：one is from stock market’s information and the other is from option’s market. This research used the two markets’ information to measure credit risk and compared which market’s data have higher implied information content.
This research used option-based structural model: Merton Model and the Implied Volatility Model which visualized an option on the firm’s equity that expired before the debt mature was a compound option and was proposed by Hull, Nelken and White in 2004. Then compare the fitting and ranking ability in the model implied credit spread of the two structural model to the observed bond credit spread between corporate bond yield and bond yield in Taiwan’s listed companies.
With the implementation of Newton’s Interpolation Formula, we successfully estimate the unobserved bond credit spread with positive or negative credit ratings, such as: twA+, twA-, twBB+. By characterizing warrant as a call on call’s compound option, we find an another way to implement Implied Volatility Model proposed by Hull et al, also find a way out of the insufficiency of Taiwan’s trading records in equity call option.
|
|---|
