Stock price default boundary: A Black-Cox model approach

Yunkun Shi, Charalampos Stasinakis, Yaofei Xu, Cheng Yan and Xuan Zhang

International Review of Financial Analysis, 2022, vol. 83, issue C

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 (search for similar items in EconPapers)
JEL-codes: C11 C12 C13 G11 G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:83:y:2022:i:c:s105752192200240x

DOI: 10.1016/j.irfa.2022.102284

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