Options on Troubled Stock
Ivilina Popova and
Journal of Futures Markets, 2014, vol. 34, issue 7, 637-657
This study uses equilibrium arguments to derive closed‐form solutions for the price of European call and put options written on an individual stock when shareholders might lose all their claims on the firm. The stock price accounts for both a random probability of bankruptcy and a random probability of remaining a going concern. With a random probability of bankruptcy, shareholders lose all their claims in the firm. With a random probability of remaining a going concern, the stock price is lognormal as in the Black–Scholes model. The bankruptcy probability is correlated with aggregated wealth if the bankruptcy risk is systematic. The model is consistent with a bankruptcy probability negatively correlated with the firm's stock price. If the bankruptcy probability of a given firm increases then its stock price decreases which leads to the value of the call options written on that stock to decrease. This result is not obtainable under Merton's (1976) ruin model where the stock price and the bankruptcy probability are independent. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:637–657, 2014
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:34:y:2014:i:7:p:637-657
Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314
Access Statistics for this article
Journal of Futures Markets is currently edited by Robert I. Webb
More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().