Firm-Specific Risk-Neutral Distributions with Options and CDS

Sirio Aramonte (), Mohammad Jahan-Parvar, Samuel Rosen () and John W. Schindler ()
Additional contact information
Sirio Aramonte: Bank for International Settlements, Basel, Basel-Stadt 4051, Switzerland
Samuel Rosen: Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122-6008
John W. Schindler: Federal Reserve Board, Washington, District of Columbia 20551

Management Science, 2022, vol. 68, issue 9, 7018-7033

Abstract: We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Taken together, but not in isolation, options and CDS span the intermediate part of the distribution, which is driven by exposure to the risk of large, but not extreme, returns. Through a series of asset-pricing tests, we show that this intermediate-return risk carries a premium, particularly at times of heightened market stress.

Keywords: risk-neutral distributions; investor expectations; CDS spreads (search for similar items in EconPapers)
Date: 2022
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http://dx.doi.org/10.1287/mnsc.2021.4170 (application/pdf)

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Working Paper: Firm-specific risk-neutral distributions with options and CDS (2021)
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